SSRN Id2235937

UNIVERSITY OF NEW MEXICO SCHOOL OF LAW
LEGAL STUDIES RESEARCH PAPER SERIES
PAPER NO. 2013-06
Regulating the New Cashless World
Kevin V. Tu
February 18, 2013
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REGULATING THE NEW CASHLESS WORLD
Kevin V. Tu*
ABSTRACT
Internet and mobile payment volume is growing exponentially. From

established technology giants like Amazon, Google, and PayPal to relative
newcomers like Square and LevelUp, Internet and mobile payment systems
are changing the face of modern commerce. Consumers and merchants
have embraced cashless payment options like mobile wallets and mobile
credit card readers. Unfortunately, existing laws and regulations lag
behind. State money transmitter laws, once a virtual unknown, have
become a source of frustration and confusion. These statutes historically
regulated money transfer businesses like Western Union with an eye
toward preventing consumer harm. The plain language of such statutes,
however, purports to broadly regulate the receipt of money or monetary
value for the purpose of transmitting it to another place or location by any
means. As such, an array of business activity, from bike messengers to app
stores, is potentially implicated.
In the absence of clear guidance and inconsistent state enforcement, a
number of services that accept customer payments on behalf of merchants,
in connection with the sale of the merchant’s goods and services, have
struggled with the question of whether their unique business models are
subject to regulation. Some companies, such as Square, have apparently
decided that licensing and compliance with state money transmitter laws is
not required for the operation of their payment business. However, doing
so comes with very real risks. The Illinois Department of Financial &
Professional Regulations recently issued a cease and desist order for
alleged violations of the state’s Transmitters of Money Act. As a result,
those that do not take preventative action to comply may face regulatory
enforcement action if a state regulatory agency subsequently decides that a
particular business activity falls within the scope of the statute. In the face
of such uncertainty, Amazon, Google, and PayPal have all become licensed
* Assistant Professor, University of New Mexico School of Law; J.D., University of Washington
School of Law; B.A., University of Washington. The author thanks Professors Nathalie Martin, Max
Minzner, Dawinder Sidhu, Alex Ritchie,and Timothy Zinnecker for their thoughts on early drafts. This
Article has also benefited greatly from helpful conversations with the participants of the Pacific West
Business Law Scholars, including Professors Abe Cable, Wendy Couture, Diane Dick, Eric Franklin,
David Friedman, John Hunt, Mohsen Manesh, and Elizabeth Pollman.
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78 Alabama Law Review [Vol. 65:1:77
money transmitters under state law. Even Facebook has become licensed in
advance of launching a payments product in order to mitigate the risk of
sanctions as the development of their payments product continues to
evolve. While established companies can afford to comply, the licensing
and regulatory compliance costs exist as a barrier to entry for payment
start-ups and may stifle continued innovation if left unsettled.
This Article takes the first in-depth look at the intersection of
technology and consumer protection in the context of new and emerging
payment systems and seeks to resolve the apparent tension between the
two, suggesting a framework for modernizing state money transmitter laws
to accommodate new technology, innovative business models, and the
realities of a cashless world while still respecting the statutory purpose of
consumer protection where appropriate. As a result, the framework
proposed in this Article will facilitate continued development of new
payment services, which benefits merchant sellers (both small and large)
by providing them with more efficient and sometimes cheaper options for
accepting payments from customers without increasing the risk of harm to
the consumer customers who rely on such services to make payments.
INTRODUCTION ............................................................................................ 79
I. THE LEGAL AND REGULATORY LANDSCAPE OF MONEY
TRANSMISSION .................................................................................. 85
A. State Regulation of Money Transmission .................................. 86
1. The Definition of Money Transmission Under State
Law ...................................................................................... 87
2. Exemptions from Regulation Under State Law.................... 89
3. Compliance Requirements Under State Law ....................... 92
B. Federal Regulation of Money Transmission.............................. 94
1. The Definition of Money Transmission Under Federal
Law ...................................................................................... 95
2. Exemptions from Regulation Under Federal Law ............... 96
3. Compliance Requirements Under Federal Law .................. 98
II. THE POTENTIALLY EXPANSIVE REACH OF REGULATION ....................... 98
A. Traditional Money Transfer Businesses .................................... 99
B. Incidental Money Transfer ...................................................... 100
C. New and Emerging Payment Systems ...................................... 101
1. Stored Value and Gift Cards.............................................. 102
2. Online Marketplaces and App Stores ................................ 104
3. Shopping Carts and Checkout Services ............................. 106
4. Mobile Wallets and Mobile Payment ................................. 107
5. Mobile Card Readers ......................................................... 108
III. THE ADVERSE IMPACT OF UNCERTAINTY ON THE PAYMENT
INDUSTRY........................................................................................ 109
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2013] Regulating the New Cashless World 79
A. Transaction Costs .................................................................... 109

B. Stifling Innovation ................................................................... 112
IV. A MODERN APPROACH TO MONEY TRANSMISSION THAT
RESPECTS CONSUMER PROTECTION ............................................... 113
A. The Unique Consumer Risks of Payment Innovations ............. 114
1. Differentiating Risk ............................................................ 115
2. An Added Layer of Consumer Protection .......................... 118
B. Statutory Purpose Does Not Support Indiscriminate
Extension ................................................................................. 122
C. What About Merchant Protections? ........................................ 123
D. Indiscriminate Extension Needlessly Hinders Innovation
and Ignores Marketplace Realities .......................................... 124
1. Lessons from the Federal Reserve Board .......................... 125
2. Lessons from Banking and Financial Regulation .............. 126
V. THE FRAMEWORK FOR A MODEST PROPOSAL ...................................... 128
A. The Agent of a Payee Exemption ............................................. 129
B. The Federal Approach ............................................................. 131
C. A Mash-Up of the State and Federal Approaches ................... 131
D. Benefits of the Proposed Framework ..................................... 133
1. Providing Much-Needed Clarity ........................................ 133
2. Upholding Consumer Protection ....................................... 135
3. Accommodating Innovative Business Models, Modern
Technology, and Commerce .............................................. 137
CONCLUSION .............................................................................................. 137
INTRODUCTION
As merchants and consumers increasingly adopt and embrace

technological innovations to the traditional channels through which they
engage in commerce, established laws and regulatory frameworks must be
reassessed for both relevance and applicability. Nowhere is this more
evident than with respect to new and emerging forms of payment. The way
that consumers pay for goods and services has undergone transformational
change in recent years. Where paper-based payment systems such as cash
and checks once ruled, and credit/debit cards and stored value cards now
dominate, Internet and mobile payments threaten to take over.1
1. See Colin C. Richard, Dodd-Frank, International Remittances, and Mobile Banking: The
Federal Reserve’s Role in Enabling International Economic Development, 105 NW. U. L. REV.
COLLOQUY 248, 253–54 (2011); A Summary of the Roundtable Discussion on Stored-Value Cards and
Other Prepaid Products, FEDERAL RESERVE (Jan. 12, 2005), http://www.federalreserve.gov/
paymentsystems/storedvalue/default.htm; Peter Cohan, Will Square’s Starbucks Deal Spark the End of
Cash?, FORBES (Aug. 8, 2012, 8:24 AM), http://www.forbes.com/sites/petercohan/2012/08/08/will-

The use of Internet and mobile payment technologies to conclude

purchase and sale transactions has become commonplace and is expected to
grow exponentially. Some forecasts predict that global business to
consumer e-commerce sales will top $1.25 trillion per year by 2013, noting
that annual business to consumer e-commerce sales increased by 20% from
2010 to 2011.2 Goldman Sachs predicts similar growth, finding that global
e-commerce sales will reach $963 billion by 2013, with an annual growth
rate of 19.4%.3 Mobile commerce will likely see a similar upward
trajectory with analysts anticipating that mobile payment transactions will
grow nearly four-fold over the next five years to more than $1.3 trillion.4
Capitalizing on these changing commerce habits, payment industry
innovators have introduced a number of new services that facilitate the
acceptance of Internet and mobile payments by merchants when selling
their goods or services. Instead of developing the capability to accept
Internet and mobile payments directly, merchants may now select from a
host of third-party service providers. Those who provide some form of
Internet or mobile payment services to merchants include giants such as
Amazon,5 Google,6 Isis (an alliance between T-Mobile, AT&T and Verizon
squares-starbucks-deal-spark-the-end-of-cash/; Suzanne McGee, End Of Cash: Six Things That Could

Take The Place Of Paper Money, HUFFINGTON POST (May 8, 2012, 11:44 PM),
http://www.huffingtonpost.com/2012/05/08/end-of-cash-replacing-money_n_1500885.html#slide=more
225166; Deirdre Van Dyk, The End of Cash, TIME (Jan. 9, 2012), at 48; D. Steven White, Predicting
U.S. E-Commerce Growth Through 2013, ALL THINGS MARKETING (Dec. 2, 2011),
http://dstevenwhite.com/2011/12/02/predicting-u-s-e-commerce-growth-through-2013/ (last visited
Sept. 30, 2013); D. Steven White, U.S. E-Commerce Growth 2000-2009, ALL THINGS MARKETING
(Aug. 20, 2010), http://dstevenwhite.com/2010/08/20/u-s-e-commerce-growth-2000-2009/ (discussing
e-commerce growth from 2000 to 2009); David Wolman, Time for Cash to Cash Out?, WALL ST. J.
(Feb. 11, 2012), http://online.wsj.com/article/SB100014240529702041364045772
09241595751130.html.
2. Abdul Montaqim, Global e-Commerce Sales Will Top $1.25 Trillion by 2013, INTERNET
RETAILER (June 14, 2012, 10:19 AM), http://www.internetretailer.com/2012/06/14/global-e-commerce-
sales-will-top-125-trillion-2013.
3. Don Davis, Global e-Commerce Sales Head to the $1 Trillion Mark, INTERNET RETAILER (Jan.
4, 2011, 3:02 PM), http://www.internetretailer.com/2011/01/04/global-e-commerce-sales-head-1-
trillion-mark.
4. Press Release, Juniper Research, Mobile Payments to Reach $1.3tn Annually by 2017, as NFC
and Physical Goods Sales Accelerate (Aug. 15, 2012), available at
http://juniperresearch.com/viewpressrelease.php?pr=332.
5. See AMAZON PAYMENTS, http://www.amazonservices.com/services/amazon-payments.html
(last visited Sept. 30, 2013) (describing how sellers can use Amazon Payments to accept payments on
the seller’s website); AMAZON SERVICES, http://www.amazonservices.com/selling-on-amazon/how-it-
works.htm (last visited Sept. 30, 2013) (describing how sellers can sell on Amazon.com); see also infra
Part II.C.
6. See Google Checkout, GOOGLE, http://checkout.google.com/seller/what.html?hl=en&gl=GB
(last visited Sept. 30, 2013) (describing how merchants can use Google Checkout to process payments);
Google Wallet, GOOGLE, http://www.google.com/wallet/how-it-works/ (last visited Sept. 30, 2013)
(describing how Google Wallet can be used to make online and in-store payments); see also infra Part
II.C.

Wireless),7 Merchant Customer Exchange (a mobile commerce platform

created by leading U.S. retailers including BestBuy, Target Corp., and Wal-
Mart Stores),8 PayPal,9 Apple,10 and Android.11 In addition, upstarts such as
Square12 and LevelUp13 clutter the market.14
While the business model, functionality, and scope of each payment
service can vary greatly, the service provider generally offers a mechanism
through which it acts on behalf of a merchant in accepting an Internet or
mobile payment from a buyer of the merchant’s goods or services and
facilitates the transfer of the payment to the merchant. Online
marketplaces,15 application stores,16 checkout or shopping cart services,17
7. See ISIS, http://isisforbusiness.com/ (last visited Sept. 30, 2013) (describing how merchants can
use Isis to accept mobile payments); see also infra Part II.C.
8. See Press Release, Merch. Customer Exch., Leading Retailers Form Merch. Customer Exch. to
Deliver Mobile Wallet (Aug. 15, 2013), available at http://www.mcx.com/images/mcx-press-
081512.pdf (describing a mobile wallet service that can be accepted as a form of payment by
participating merchants); see also infra Part II.C.
9. See However You Do Business, PayPal Gets You Paid, PAYPAL,
https://www.paypal.com/webapps/mpp/merchant?intl_cid-main:mktg:personal:sell:overview|business-
solutions-x-link (last visited Sept. 30, 2013) (describing the business solutions that PayPal offers for
accepting credit card payments); Sell Overview, PAYPAL, https://www.paypal.com/webapps/mpp/
selling-with-paypal (last visited Sept. 30, 2013) (describing how PayPal can be used to accept payments
online and in person); see also infra Part II.C.
10. See iOS Developer Program, APPLE, https://developer.apple.com/programs/ios/ (last visited
Feb. 13, 2013) (describing how app developers can distribute apps via the Apple App Store); see also
infra Part II.C.
11. See Developers, ANDROID, http://developer.android.com/distribute/googleplay/about
/monetizing.html (last visited Sept. 30, 2013) (discussing how app developers can distribute their apps
via the Google Play app store); see also infra Part II.C.
12. See Payments and Receipts in Square Wallet, SQUARE, https://squareup.com/help/en-
us/article/3906-square-wallet-payments-and-receipts (last visited Sept. 30, 2013) (describing how
Square Wallets facilitates acceptance of mobile payments); Swipe Card Payments with the Square
Reader, SQUARE, https://squareup.com/help/en-us/article/5174-swipe-card-payments-with-the-square-
reader (last visited Sept. 30, 2013) (describing the app and mobile card reader that is provided to
merchants for purposes allowing a merchant to user their own mobile device to accept credit and debit
card payments); see also infra Part II.C.
13. See LEVELUP, https://www.thelevelup.com/how-it-works (last visited Sept. 30, 2013)
(describing how LevelUp facilitates the acceptance of mobile payments); see also infra Part II.C.
14. See Margaret Cashill, Mobile Payment Services Proliferate, Business Owners Save, TAMPA
BAY BUSINESS JOURNAL (Nov. 30, 2012), http://www.bizjournals.com/tampabay/print-edition/2012/11/
30/mobile-payment-services-proliferate.html?page=all (discussing the proliferation of mobile payment
systems); Thomas F. Dapp, The Future of (Mobile) Payments: New (Online) Players Competing with
Banks, DEUTSCHE BANK (Dec. 20, 2012), http://www.dbresearch.com/PROD/DBR_INTERNET_EN-
PROD/PROD0000000000298950/The+future+of+(mobile)+payments%3A+New+(online)+players+co
mpeting+with+banks.PDF (Sept. 30, 2013) (discussing the rise of mobile and online payments and the
growth of non-bank competitors in the provision of payment and financial-related services); Leena Rao,
The Mobile Payments Fustercluck, TECH CRUNCH (Sep. 9, 2012),
http://techcrunch.com/2012/09/09/the-mobile-payments-fustercluck/ (noting that a new way to pay
using a mobile phone seems to pop up every week).
15. Online marketplaces like the Amazon Marketplace allow independent merchants (big and
small) to sell on Amazon.com. In connection with providing the sales platform, Amazon handles the
payment process, receiving credit/debit card information from the buyer and settling with the merchant.
See infra Part II.C.

mobile wallets,18 and mobile card readers19 all involve some degree of
Internet or mobile payment acceptance and processing on behalf of
merchant sellers. Although the customer pays the service provider (e.g., by
providing credit/debit card information), the merchant is in fact the seller of
record from whom the purchase is made. As such, the service provider
essentially functions as a third-party intermediary who accepts Internet
and/or mobile payments from a buyer on behalf of the merchant,
subsequently transferring the funds to the merchant (hereinafter referred to
generally as “payment services”).
The sheer number of Internet and mobile payment options and speed of
adoption highlights the conundrum: how can any legal and regulatory
regime possibly keep up with the pace of technological advances and
adoption? Internet and mobile payment methods have revolutionized
modern commerce, but the law understandably lags behind. As a
component part of establishing a comprehensive and consistent regulatory
regime for new and merging payment systems, this Article suggests that
existing laws, such as state money transmitter laws, must be reexamined in
light of technological advances and changes in consumer behavior to
clearly define the scope of their applicability to new business models.
Money transmitter laws are essentially “safety and soundness” laws
aimed at protecting consumers from suffering losses, and have traditionally
governed money transfers services like Western Union. However, the
sweeping language of such statutes and the lack of clearly applicable
exemptions threaten to subsume a number of innovative business models,
including many new and emerging payment systems. Given the burden and
expense of state-specific licensing and compliance requirements, this has
created real problems for potentially regulated businesses who must
struggle to ascertain whether money transmitter laws extend to their
activities. In short, businesses are faced with a choice between two
16. App stores depend on independent developers to create apps that are made available for
purchase on hosted app stores. The service provider receives payments from those who purchase apps
and subsequently settles with the developer/seller. See infra Part II.C.
17. Payment services, such as PayPal and Amazon Payments, allow merchants to accept
credit/debit cards via the Internet by placing a “check out” button or “shopping cart” on the merchant’s
website. Although the buyer visits the merchant’s website instead of a third-party marketplace, the
payment process is operated by a third-party service provider who subsequently settles with the
merchant. See infra Part II.C.
18. Mobile wallets, such as Google Wallet, Isis, Square, LevelUp and Merchant Customer
Exchange, allow a consumer to use a smartphone like a credit/debit card. The consumer’s credit/debit
card information is stored by the service provider, and in-store purchases can be made by waving the
phone in front of a scanner provided to the merchant, which transfers the payment card information
with the service provider, subsequently settling with the merchant. See infra Part II.C.
19. Payment services like Square and PayPal provide merchants with a mobile credit/debit card
reader and a mobile application that allows the merchant to use its own mobile device to accept
credit/debit card payments. The service provider receives the payment card information, initiates the
payment process, and facilitates settlement with the merchant. See infra Part II.C.

undesirable alternatives20: forgo state licensing and risk sanction from a

state regulator21 or bear the potentially unnecessary cost of compliance.22
While established companies like Amazon, Google, PayPal, and even
Facebook have the resources to mitigate the risk by becoming licensed, the
cost for start-ups may be prohibitive. Accordingly, the unsettled legal and
regulatory environment has the potential to disincentivize the continued
development of desirable payment innovations.
This Article attempts to reconcile the apparent conflict between the
statutory purpose of consumer protection and the desire for advancements
that promote commerce by: (1) setting forth an approach for recasting state
money transmitter laws in light of technological advances while respecting
the consumer protection purpose of such statutes; and (2) supporting the
adoption of an exemption that is tailored to differentiate new payment
services in light of their relative risk of consumer loss—extending
regulation where appropriate and exempting innovations where little risk
exists.
Part I of this Article overviews the laws and regulations that presently
govern the business of money transmission. In the absence of an explicit
statutory exemption, state money transmitter laws purport to regulate any
activity that falls within the statutory definition of “money transmission”23
20. Complaint at 3–4, Think Computer Corp. v. Dwolla, Inc. et al, No. 5:13-cv-02054-EJD (N.D.
Cal. May 6, 2013), available at http://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?
article=1379&context=historical (describing the dilemma facing payments providers in determining the
applicability of state money transmitter laws to new technology along with the inconsistent enforcement
of such laws by state regulators).
21. See, e.g., Cease and Desist Order, No. 13 CC 208, State of Ill. Dep’t of Fin. & Prof’l
Regulation, Div. of Fin. Inst., available at http://www.idfpr.com/dfi/CCD/Discipline/SquarePersonified
CDOrder13CC208.pdf (noting the penalties and fines imposed on Square for violations of the Illinois
money transmitter law); Letter from Aaron Greenspan, Think Computer Corp. President & CEO, to
Roger Dickinson, Cal. State Assemb., Comm. on Banking & Fin. Chairman (Nov. 7, 2012) [hereinafter
Letter from Greenspan], available at https://s.facecash.com/legal/20121107.dficomment.pdf (noting
that Think Computer Corporation shut down its mobile payment product after threats of incarceration
from California regulators based on alleged violations of the California money transmitter law); Ken
Yeung, Square Served Cease and Desist Order in Illinois for Violating the Transmitters of Money Act,
NEXT WEB (Mar. 1, 2013, 7:37 PM), http://thenextweb.com/insider/2013/03/01/square-receives-cease-
and-desist-from-illinois-regulators/ (noting that the Illinois Department of Financial & Professional
Regulation recently issued Square a cease and desist order for violating the state’s money transmitter
law).
22. See, e.g., Brittany Darwell, Facebook Obtains Money Transmitter Licenses in 15 States,
INSIDE FACEBOOK (Feb. 22, 2012), http://www.insidefacebook.com/2012/02/22/facebook-obtains-
money-transmitter-licenses-in-15-states/ (last visited Oct. 1, 2013); Sean Sposito, Facebook Fast-
Tracks Its Payments Business, AMERICAN BANKER (Feb. 21, 2012),
http://www.americanbanker.com/issues/177_35/facebook-credits-money-transmitter-license-bank-
regulation-1046825-1.html (noting Facebook’s election to become licensed under state money
transmitter laws in anticipation of potential regulation of a developing payment product).
23. “Money transmission” is often broadly defined as the receipt of money or value for the
purpose of transferring it to another person or location by any means. See infra Part I.A.1.

and imposes a myriad of state-specific licensing,24 financial security,25

examination,26 recordkeeping,27 and reporting requirements.28
Part II of this Article illustrates how the broad definition of “money
transmission” coupled with a limited list of explicit exemptions results in
an uncertain regulatory environment where a host of services from bike
messengers to app stores could potentially fall within the scope of
regulation.29
Part III of this Article explores the growing outcry about the lack of
clarity and how it adversely impacts the providers of Internet and mobile
payment services.30 The providers of such services face an unappealing
dilemma. They can obtain a license and incur the cost and expense of
maintaining compliance with a patchwork of state-specific requirements
(perhaps needlessly),31 or they can elect to forego licensing and run the risk
24. See infra Part I.

25. The financial security requirements generally include an obligation to provide a surety bond,
which varies in amount depending on the state. See, e.g., COLO. REV. STAT. ANN. § 12-52-107(1)(a)
(West 2010). In addition, licensed money transmitters must typically satisfy minimum net worth
requirements and may be required to maintain minimum amounts of permissible investments. See, e.g.,
CONN. GEN. STAT. ANN. § 36a-603 (West 2011); D.C. CODE § 26-1004 (2001); see also infra Part
I.A.3.
26. Depending on the state, regulators may require audits, investigate a money transmitter’s
books and records or conduct an onsite examination. See, e.g., IOWA CODE ANN. § 533C.501(1) (West
2011); MD. CODE ANN., FIN. INST. §§ 12-421, 12-423, 12-424 (LexisNexis 2011); see also infra Part
I.A.3.
27. Licensed money transmitters must generally maintain certain records for statutorily mandated
periods of time. See, e.g., KY. REV. STAT. ANN. § 286.11-029 (West 2011); see also infra Part I.A.3.
28. Licensed money transmitters must generally file financial reports with state regulators on a
regular basis and may be required to make periodic filings upon the occurrence of specified events. See,
e.g., FLA. STAT. ANN. § 560.118(1) (West 2012) (requiring filing of annual financial statements and
quarterly reports); id. § 560.126 (requiring written notice of significant events); see also infra Part
I.A.3.
29. See infra Part II.
30. Concerns have been expressed over the potential application of federal and state money
transmitter laws to new and emerging payment systems, including the chilling effect on innovation by
start-up due to the unsettled regulatory landscape and the costs of compliance. See Letter from
Greenspan, supra note 21; Marie Hogan, California’s New Money Transmission Law Sweeps Up,
JOSEPH & COHEN (May 19, 2011), http://josephandcohen.com/2011/05/californias-new-money-
transmission-law-sweeps-up; Brian J. Hurh & Peter Luce, Regulators Emphasize Importance of Money
Transmission Laws, Consumer Protection and Other Regulatory Compliance for Mobile and Other
Emerging Payment Innovations, PAYMENT LAW ADVISOR (Oct. 3, 2012),
http://www.jdsupra.com/legalnews/regulators-emphasize-importance-of-money-65722/; James Mariani,
The California Money Transmission Act: Boon to Consumers or Bane to Innovation?, TIMELY TECH
(Sept. 26, 2012), http://illinoisjltp.com/timelytech/?p=1 (last visted Oct. 1, 2013); Owen Thomas, This
Innovation-Killing California Law Could Get a Host Of Startups In Money Trouble, BUSINESS INSIDER
(July 11, 2012, 6:21 PM), http://www.businessinsider.com/california-money-transmitter-act-startups-
2012-7#ixzz2KW3UA2hZ; see also infra Part III.
31. See supra note 30.

of civil and criminal penalties should a state regulator determine that their
business constitutes money transmission.32
Part IV of this Article illustrates how the statutory purpose of money
transmitter laws—to protect consumers from suffering losses at the hands
of non-performing money transmitters—is not served by blindly extending
regulation to Internet and mobile payment systems.33 In situations where
there is no greater risk of consumer loss, such an approach is overly
expansive and needlessly impinges upon commerce while wholly ignoring
the evolving habits of merchants and consumers.
Part V of this Article concludes that the continued growth of Internet
and mobile payments accentuates the need for legislative action and
proposes that state money transmitter laws be amended to include a
narrowly tailored “agent of the payee” exemption. Such an exemption
would amend the definition of “money transmission” to unambiguously
exclude the receipt of a payment for delivery to a merchant in connection
with a sale by the merchant so long as: (1) the service is provided to or on
behalf of a merchant and not directly to a consumer; (2) the service
provider is acting pursuant to a written contract with the merchant; and (3)
the contract and terms of service mitigate the risk of loss to the consumer
by acknowledging that payment to the service provider constitutes payment
to the merchant and that the merchant has no claim against the consumer
for the failure of the service provider to transfer the payment to the
merchant.34 This approach assures that state money transmitter laws will be
fittingly recast in light of technological advances and market realities while
upholding the consumer protection goals of such statutes where
warranted.35
I. THE LEGAL AND REGULATORY LANDSCAPE OF MONEY TRANSMISSION
United States regulation of money transmission employs a dual-system

of both state and federal laws. State money transmitter laws vary by
jurisdiction36 and focus on consumer protection concerns.37 As such, state
32. See 18 U.S.C. § 1960 (2006); MD. CODE ANN., FIN. INST. §§ 12-429 to 430 (LexisNexis
2011); Letter from Greenspan, supra note 21.
33. See infra Part IV.
34. See infra Part V.
35. See infra Part V.
36. See UNIF. MONEY SERV. ACT, prefatory note, 7A U.L.A. 163–64 (2006), available at
http://www.uniformlaws.org/shared/docs/money%20services/umsa_final04.pdf (noting that state laws
are “extremely varied”); see also infra Part II.A.
37. See, e.g., CAL. FIN. CODE § 2002 (West 2013) (noting that the purpose of the statute is to
protect the interests of consumers); VA. CODE ANN. § 6.2-1902(B) (2010) (“This chapter shall be
construed by the Commission for the purpose of protecting, against financial loss, residents of the
Commonwealth who (i) purchase money orders or (ii) give money or control of their funds or credit

money transmitter laws are essentially “safety and soundness” statutes

designed to ensure that consumer funds are protected from loss.38 In
contrast, the Bank Secrecy Act (BSA), which regulates money transmission
at the federal level, exists primarily as an anti-money laundering statute.39
Despite the differing purpose, state and federal money transmitter laws
both opt to define the regulated activity of “money transmission” in broad
terms,40 relying on a list of explicit statutory exemptions to narrow the
scope of regulation.41 Unless an exemption applies, any person engaging in
an activity that constitutes “money transmission” must be licensed under
state law42 and comply with a host of regulatory requirements involving
financial security, recordkeeping, reporting, and examination.43
A. State Regulation of Money Transmission
While the statutory language varies from state to state,44 money

transmitter laws generally seek to regulate the business of receiving money
(or monetary value) for the purpose of transmission to another person or
location.45 State money transmitter laws require that any person engaging
in such activity obtain a license from the appropriate state regulator46 and
into the custody of another person for transmission . . . .”); Regulation of Money Transmitters in Texas:
An Overview, TEXAS DEP’T OF BANKING, http://www.banking.state.tx.us/news/speeches/2004/11-10-
04sp.htm#texasregulations (noting that “the overriding focus is consumer protection”).
38. See UNIF. MONEY SERV. ACT, prefatory note, 7A U.L.A. 163–64.
39. See 31 U.S.C. § 5311 (2006); see also FinCEN’s Mandate from Congress, FIN. CRIMES
ENFORCEMENT NETWORK, http://www.fincen.gov/statutes_regs/bsa/.
40. See, e.g., CAL. FIN. CODE § 2003(o) (West 2013); WASH. REV. CODE ANN. § 19.230.010(18)
(West 1961). But see NEV. REV. STAT. ANN. §§ 671.010, 671.040(1) (LexisNexis 2009) (generally
regulating the business of “receiving for transmission or transmitting money” without otherwise
defining the scope of such activity).
41. See, e.g., ARIZ. REV. STAT. ANN. § 6-1203 (2007); COLO. REV. STAT. ANN. § 12-52-105
(West 2010); UNIF. MONEY SERV. ACT § 103 cmt. 1, 7A U.L.A. 184 (2006) (noting five exemptions
that are typically available).
42. See, e.g., N.Y. BANKING LAW § 641(1) (McKinney 1939); WASH. REV. CODE ANN.
§ 19.230.030 (West 1961); UNIF. MONEY SERV. ACT § 201, 7A U.L.A. 186 (2006) (setting forth the
licensing requirement).
43. See infra Part I.A.3.
44. While state money transmitter statutes differ from jurisdiction to jurisdiction, there have been
efforts to achieve more uniformity. Recognizing that existing state regulation is “extremely varied,” the
National Conference of Commissioners on Uniform State Laws has advanced the Uniform Money
Services Act of 2000, which regulates money services business like money transmission. To date, only
6 states have enacted some form of the Uniform act. See UNIF. MONEY SERV. ACT, prefatory note, 7A
U.L.A. 163–64 (2006); Legislative Fact Sheet—Money Services Act, UNIFORM LAW COMMISSION,
http://www.uniformlaws.org/LegislativeFactSheet.aspx?title=Money%20Services%20Act. As a result
there is little uniformity amongst state money transmitter laws.
45. See, e.g., CAL. FIN. CODE § 2003(s); UNIF. MONEY SERV. ACT § 102(14), 7A U.L.A. 178
(2006).
46. See, e.g., IDAHO CODE ANN. § 26-2903(1) (2000) (requiring a license from the Director of the
Idaho Department of Finance to engage in money transmission business); 205 ILL. COMP. STAT. ANN.
657/10 (West 2007) (requiring a license from the Director of the Illinois Department of Financial

comply with other requirements imposed on licensed money transmitters.47

Unlicensed money transmission is flatly prohibited unless a valid
exemption applies48 and is punishable by both criminal and civil
penalties.49 When analyzing whether a specific activity is regulated under a
state money transmitter statute the key considerations are: (1) whether the
activity falls within the definition of money transmission; and (2) whether a
statutory exemption exists to remove the activity from the ambit of the
statute. In the absence of an applicable exemption, any activity that
otherwise falls within the definition of “money transmission” is potentially
subject to the scrutiny of state regulators.50
1. The Definition of Money Transmission Under State Law
Most states attempt to define the scope of regulation by way of a

broadly inclusive statutory definition.51 The definitions set forth in the
Arizona and Maryland statutes are illustrative of the breadth that is often
found. Arizona defines “transmitting money” as “the transmission of
money by any means including . . . by payment instrument, wire, facsimile,
internet or any other electronic transfer, courier or otherwise.”52 In
Maryland, the term “money transmission” is defined as “the business of
selling or issuing payment instruments or stored value devices, or receiving
money or monetary value, for transmission to a location within or outside
the United States by any means, including electronically or through the
Internet.”53
Institutions to engage in money transmission business); N.Y. BANKING LAW § 641(1) (generally
requiring a license in order to engage in the business of receiving money for transmission or
transmitting the same); WASH. REV. CODE ANN. § 19.230.030 (requiring a license in order to engage in
the business of money transmission or to hold oneself out as providing money transmission); UNIF.
MONEY SERV. ACT § 201, 7A U.L.A. 186 (setting forth the licensing requirement).
47. See infra Part I.A.3.
48. See, e.g., IDAHO CODE ANN. § 26-2904; 205 ILL. COMP. STAT 657/15; Money Services Act
Summary, UNIFORM LAW COMMISSION, http://uniformlaws.org/ActSummary.aspx?title=Money
%20Services%20Act [hereinafter Money Services Act Summary] (acknowledging that the act is broadly
inclusive).
50. See Hurh & Luce, supra note 30 (“Government representatives from both civil and criminal
enforcement agencies shared cautionary tales of both new and established companies that learned the
hard way about the broad applicability of state money transmitter licensing laws.”); Money Services Act
Summary, supra note 48.
51. See, e.g., IDAHO CODE ANN. § 26-2902(11); 205 ILL. COMP. STAT 657/5. But see NEV. REV.
STAT. ANN. § 671.010 (LexisNexis 2009); NEV. ADMIN. CODE § 671.005–.100 (2010) (regulating the
business of transmitting money or credits without providing a statutory definition or any other guidance
as to the intended scope of regulation, which results in ambiguity and the possibility of the statute being
narrowly or broadly construed).
52. ARIZ. REV. STAT. ANN. § 6-1201(17) (2007) (emphasis added).
53. MD. CODE ANN., FIN. INST. § 12-401(m)(1) (LexisNexis 2011) (emphasis added).

Instead of narrowly defining the types of businesses that constitute

money transmitters (e.g., money transfer services directed toward
consumers), the Arizona and Maryland statutes, like many other state
money transmitter laws, depend on a sweeping definition that is
constrained by few explicit limits.54 The definitions do not appear to be
concerned with the volume of money transmission or the method by which
the transmission is accomplished.55 In addition, the statutes do not apply
solely to the transmission of money (typically defined as a medium of
exchange that is authorized or adopted by the United States or a foreign
government).56 Instead, the scope has been expanded to encompass the
transmission of monetary value (typically defined as a medium of
exchange, whether or not redeemable in money).57 The only explicit
limitation within the definition itself is the requirement that the money
transmitter provide money transmission as a business.58 Therefore, despite
definitional differences between jurisdictions,59 money transmission
arguably encompasses almost any commercial activity where money is
taken from one person or place and delivered to another.60 California state
regulators have quite literally adopted such an approach, acknowledging
the use of a plain language test to guide decisions on whether a particular
business model or technology falls within the scope of regulation.61 Under
this test, if a person takes money (or value) from person A and pays it to
54. See ARIZ. REV. STAT. ANN. § 6-1201(17); MD. CODE ANN., FIN. INST. § 12-401(m)(1).
55. See ARIZ. REV. STAT. ANN. § 6-1201(17); MD. CODE ANN., FIN. INST. § 12-401(m)(1). But
see UNIF. MONEY SERV. ACT § 102(14), 7A U.L.A. 178 (2006) (defining “money transmission” broadly
as “selling or issuing payment instruments, stored value, or receiving money or monetary value for
transmission” but excluding any “delivery, online or telecommunications services, or network access”
from its scope, which appears to exclude entities that solely provide delivery services (presumably
courier or package delivery services) and entities that act as mere conduits for the transmission of data
(such as internet service providers)).
56. See UNIF. MONEY SERV. ACT § 102(11), 7A U.L.A. 178 (2006).
57. See id. § 102(12), 7A U.L.A. 178 (2006); see also id. § 102, cmt. 10 (noting the expansion of
the definition of money such that it is inclusive of anything that (1) serves as a medium of exchange and
(2) places the customer at risk of the provider’s insolvency while the medium is outstanding).
59. See, e.g., MICH. COMP. LAWS ANN. § 487.1003(c) (West Supp. 2013) (defining “money
transmission services” as “selling or issuing payment instruments or stored value devices or receiving
money or monetary value for transmission”); N.J. STAT. ANN. § 17:15C-2 (West 2001) (defining
“money transmitter” as “a person who engages in this State in the business of: (1) the sale or issuance of
payment instruments for a fee, commission or other benefit; (2) the receipt of money for transmission or
transmitting money within the United States or to locations abroad by any and all means, including but
not limited to payment instrument, wire, facsimile, electronic transfer, or otherwise for a fee,
commission or other benefit; or (3) the receipt of money for obligors for the purpose of paying obligors’
bills, invoices or accounts for a fee, commission or other benefit paid by the obligor”).
60. See Thomas, supra note 30 (discussing the use of a plain-English test by California
regulators); see also infra Part II (providing examples of the wide range of activities and business
models that may fit within the plain language definition of “money transmission”).
61. Id.

person B on behalf of person A then the activity is subject to regulation.62 A

broadly inclusive construction has also been supported by the National
Conference of Commissioners on Uniform State Laws (NCCUSL) in its
uniform act to address money services business like money transmission.63
Accordingly, money transmitter laws are not strictly limited o regulating
traditional money transfer businesses like Western Union. Instead, a variety
of business models from courier services to Internet and mobile payment
services such as PayPal and Square could conceivably fall within the scope
of regulation.
2. Exemptions from Regulation Under State Law
Given the potentially expansive scope of money transmission, each

state’s list of exemptions exists as the only meaningful mechanism for
ensuring that a particular activity is excluded from regulation. The state-
specific nature of money transmitter statutes makes generalization difficult.
However, there is some minimal level of commonality.64 State money
transmitter statutes often exempt “money transmission” when conducted by
certain categories of persons.65 The most common exemptions are for: (1)
the federal and state government;66 (2) those making transfers on behalf of
the government or in connection with government benefits;67 (3) regulated
banks and financial institutions;68 (4) authorized agents or delegates of a
licensed money transmitter;69 and (5) the United States Postal Service.70 As
such, only a lucky few—usually the government71 and those operating in
heavily regulated industries72—will be able to take advantage of an
exemption.73 Exempt persons generally may engage in what would
62. Id.
63. See Money Services Act Summary, supra note 48.
64. See UNIF. MONEY SERV. ACT § 103, cmt. 1, 7A U.L.A. 184 (2006).
65. See, e.g., N.Y. BANKING LAW § 641(1) (McKinney 1939); WASH. REV. CODE ANN.
§ 19.230.020 (West 1961).
66. See, e.g., ARIZ. REV. STAT. ANN. § 6-1203(A)(1)–(2) (2007); COLO. REV. STAT. ANN.
§ 12-52-105 (West 2010); D.C. CODE § 26-1003(a)(1), (3) (2001); FLA. STAT. ANN. § 560.104(2)–(3)
(West 2012).
67. See, e.g., CONN. GEN. STAT. ANN. § 36a-609(4) (West 2011); D.C. CODE § 26-1003(a)(5).
68. See, e.g., ARIZ. REV. STAT. ANN. § 6-1203(B)(1); COLO. REV. STAT. ANN. § 12-52-105;
CONN. GEN. STAT. ANN. § 36a-609(1)–(2); D.C. CODE § 26-1003(a)(4); FLA. STAT. ANN. § 560.104(1);
GA. CODE ANN. § 7-1-681 (2004).
69. See, e.g., D.C. CODE § 26-1003(b); GA. CODE ANN. § 7-1-681; KY. REV. STAT. ANN.
§ 286.11-003(2) (LexisNexis Supp. 2010); N.Y. BANKING LAW § 641(1); WASH. REV. CODE ANN.
§ 19.230.030(b) (West 1961).
70. See, e.g., CONN. GEN. STAT. ANN. § 36a-609(3); D.C. CODE § 26-1003(b); GA. CODE ANN.
§ 7-1-681.
71. See, e.g., UNIF. MONEY SERV. ACT § 103(1), (2), (3), (5), 7A U.L.A. 183 (2006).
72. See id. § 103(4), (6), (7), (8), (10), 7A U.L.A. 184.
73. See id. §§ 103(1)–(10), 201, 7A U.L.A. 183–86.

otherwise be categorized as “money transmission” without a license and

without complying with the regulatory requirements imposed on licensed
money transmitters.74
Perhaps recognizing the practical implications of a broadly inclusive
definition coupled with a limited number of exemptions, certain states have
incorporated additional exemptions. While the availability of such
exemptions may be limited, they provide additional certainty by explicitly
eliminating certain activities from regulation. For example, some states
exempt money transmission by: (1) an incorporated telegraph or cable
company so long as the money received is immediately transmitted;75 (2) a
courier service;76 (3) an agent or authorized delegate of a person who is
exempt from the statute;77 (4) an agent of a payee (i.e., someone who is
authorized by the principal to whom a payment is made to receive and
transfer such payment to the principal);78 or (5) money transmissions that
are incidental to and a necessary part of a lawful business.79
The impact of new technology on the manner in which money is
transferred amongst multiple parties by way of bookkeeping entries in lieu
of physically delivering a tangible form of payment has also spurred the
adoption of additional exemptions. Certain states have recognized the
potential for money transmitter regulations to apply in the contexts of: (1)
clearing and settling credit/debit card transactions;80 and (2) issuing stored
74. See, e.g., ARIZ. REV. STAT. ANN. § 6-1203 (2007); FLA. STAT. ANN. § 560.104 (West 2012);
NEV. REV. STAT. ANN. § 671.020 (LexisNexis 2009). In some cases, only limited exemptions are
available. For example, authorized agents of a licensed money transmitter are typically exempt from the
licensing requirements and must comply with other regulatory requirements. See, e.g., WASH. REV.
CODE ANN. §§ 19.230.120, 19.230.130–40, 19.230.180, 19.230.230–40, 19.230.290.
75. See, e.g., COLO. REV. STAT. ANN. § 12-52-105 (West 2010); NEB. REV. STAT. § 8-1003(2)
(1997); NEV. REV. STAT. ANN. § 671.020(1)(c).
76. HAW. REV. STAT. ANN. § 489D-4 (LexisNexis2012) (defining “money transmission” as not
applicable to courier services).
77. Some states exempt authorized delegates of an exempt person, such as a bank or agents of a
licensed money transmitter from the need to apply for and obtain a license. See TEX. FIN. CODE ANN.
§§ 151.003(5), 151.302(a)(2) (West 2013). As such, licensed money transmitters may conduct money
transmission through authorized delegates by complying with certain additional regulatory requirements
designed to ensure that the principal retains responsibility for the acts of the authorized delegate. See id.
§ 151.403. However, agents of licensed money transmitters may be precluded from further delegating to
another unlicensed person. See, e.g., WASH. REV. CODE ANN. § 19.230.010(4) (“A person that is
exempt from licensing . . . cannot have an authorized delegate.”).
78. See, e.g., NEV. REV. STAT. ANN. § 671.040(2) (permitting agents of a payee to engage in
money transmission); N.Y. BANKING LAW § 641 (McKinney 1939) (permitting agents of a payee to
engage in money transmission); OHIO REV. CODE ANN. § 1315.01(G) (West Supp. 2013) (defining the
term “transmit money” as not including “transactions in which the recipient of the money or its
equivalent is the . . . authorized representative of the principal in a transaction for which the money or
its equivalent is received, other than the transmission of money or its equivalent”).
79. See, e.g., KAN. STAT. ANN. § 9-511 (2001).
80. These states typically exempt “operators of a payment system” but only to the extent that they
provide processing, clearing, or settlement services between entities exempt from the state’s money
transmitter laws. See, e.g., OKLA. STAT. ANN. tit. 6, § 1512(6) (West Supp. 2013); OKLA. ADMIN. CODE

value devices such as gift cards.81 To clarify the scope of regulation in

these new contexts, some states have adopted limited exemptions that
appear to apply where the risk of consumer loss is minimal. For example,
the exemption for money transmission in connection with clearing or
settling credit/debit card transactions only applies where the person
transfers money between exempt persons (i.e., financial institutions) who
are otherwise subject to a comprehensive regulatory regime.82 Likewise,
the issuer of a stored-value device can only take advantage of an exemption
in a closed-system where the gift card is redeemable only for goods or
services from the merchant who issues the card and not in an open-system
where the card is redeemable broadly at a number of different merchants.83
Even so, many states have done little to address the treatment of new and
emerging payment mechanisms such as stored value, electronic currency,
and mobile wallets under money transmitter laws.84
As illustrated by the foregoing, state money transmitter statutes contain
state-specific nuances. However, the statutory language is often broadly
worded such that they may be deemed to regulate a wide variety of
business activities unless a statutory exemption applies. Statutory
exemptions vary by state but only apply to a narrow set of enumerated
persons, potentially leaving a great deal of activity subject to regulation.
§ 85:15-1-3(9) (2012); IOWA CODE ANN. § 533C.103 (West 2011); MICH. COMP. LAWS ANN.
§ 487.1004(i) (West Supp. 2013); WASH. REV. CODE ANN. § 19.230.020(9). As such, the exemption
typically applies to organizations that provide clearing and settlement services, which involve the
transfer of funds from one participating financial institution’s bank account to another (e.g., the debiting
and crediting of accounts). See UNIF. MONEY SERV. ACT, § 103, cmt. 2, 7A U.L.A. 184–85 (2006).
81. See, e.g., IND. CODE ANN. §§ 28-8-4-3.5, 28-8-4-13, 28-8-4-15, 28-8-4-19.5, 28-8-4-20(a)
(West 2010); WASH. REV. CODE ANN. §§ 19.230.010(6), 19.230.020(12).
83. See supra note 81. For a discussion of the distinction between open-systems such as prepaid
cards issued by a financial institution like Visa, MasterCard, and American Express and closed-systems
such as gift cards issued by a specific retailer to be used for purchases directly from the retailer, see
Philip Keitel, The Laws, Regulations, Guidelines, and Industry Practices That Protect Consumers Who
Use Gift Cards, FED. RES. BANK OF PHIL. 2–3 (July 2008), available at
http://www.philadelphiafed.org/payment-cards-center/publications/discussion-papers/2008/D2008
JulyGiftCard.pdf. In addition to open and closed systems, there are hybrid systems of stored value such
as semi-closed stored value cards that can be used at multiple merchants in a specified location—for
example, a mall gift card that can be used at all retailers located in the mall. See Mark Furletti, Prepaid
Card Markets & Regulation, FED. RES. BANK OF PHIL. 4 (Feb. 2004), available at
http://www.philadelphiafed.org/payment-cards-center/publications/discussion-papers/2004/Prepaid_
022004.pdf.
84. See UNIF. MONEY SERV. ACT, prefatory note, 7A U.LA. 164 (2006) (“For the majority of
States, [the Uniform Money Services Act] will provide a new approach to the treatment of stored value
and electronic currency at the state level.”).

3. Compliance Requirements Under State Law
In the absence of an applicable exemption, state money transmitter

laws purport to regulate any activity that falls within the definition of
money transmission.85 Those that engage in money transmission must
apply for and obtain a license from the applicable state regulator.86 In
addition, licensed money transmitters are subjected to state-specific
regulatory requirements that primarily seek to ensure the financial security
of those who provide money transmitter services to consumer customers.87
The failure to obtain a license or otherwise comply may result in both civil
and criminal penalties.88
In order to obtain a license, a prospective money transmitter must
submit an application along with certain personal, business, and fitness-
related information regarding the applicant and the business.89 The state
regulator generally makes the decision to grant or deny the application for a
license on the basis of: (1) the application; (2) an investigation of the
applicant’s financial condition and responsibility, financial and business
experience, competence, character, and general fitness; and (3) in some
cases, an on-site examination.90 In connection with the licensing process,
the applicant must also pay various fees, which may include an application
fee, an annual license fee, and the costs of regulatory assessments and
investigations.91 While the process is relatively benign, the burdens and
costs of obtaining licensure under state laws increase exponentially where a
money transmitter must navigate the process in multiple jurisdictions (i.e.,
subjecting to regulation under every state licensing regime in which the
person wishes to engage in the business of money transmission).92
85. See Hurh & Luce, supra note 30 (noting that panelists at the annual Emerging Payments
Systems conference “reminded participants that ‘money transmission’ is broadly defined to encompass
any and all means of transmitting funds, with limited exceptions under various state and federal laws
and regulations”); Money Services Act Summary, supra note 48.
86. See, e.g., IDAHO CODE ANN. § 26-2903(1) (2000); 205 ILL. COMP. STAT. ANN. 657/10 (West
2007); N.Y. BANKING LAW § 641(1) (McKinney 1939); WASH. REV. CODE ANN. § 19.230.030 (West
1961).
87. The financial security requirements generally include an obligation to provide a surety bond,
which varies in amount depending on the state. See, e.g., COLO. REV. STAT. ANN. § 12-52-107(1)(a)
(West 2010). In addition, licensed money transmitters must typically satisfy a state-specific minimum
net worth and may also be required to maintain a minimum amount of permissible investments. See,
e.g., CONN. GEN. STAT. ANN. § 36a-603 (West 2011); D.C. CODE § 26-1004 (2001).
88. See, e.g., 18 U.S.C. § 1960 (2006); MD. CODE ANN., FIN. INST. §§ 12-429, 12-430
(LexisNexis 2011).
89. See, e.g., WASH. REV. CODE ANN. § 19.230.040.
90. Id. § 19.230.070.
91. Id. § 19.230.320; see also 205 ILL. COMP. STAT. ANN. 657/45; KY. REV. STAT. ANN.
§ 286.11-021 (LexisNexis Supp. 2010).
92. See UNIF. MONEY SERV. ACT § 201, cmt., 3 U.L.A. 192–93 (2006) (noting that state law
governs jurisdictional decisions regarding whether a person is engaging in the business of money
transmission and that factors such as targeting customers in the state may be relevant).

Licensed money transmitters must also comply with regulatory

requirements aimed at protecting the public by ensuring that money
transmitters have sufficient resources to honor their obligations to
consumer customers93 and giving the state regulator sufficient supervisory
power and insight into the licensee’s business to identify problems and
pursue enforcement actions.94 While the specific requirements vary widely
from state to state, licensed money transmitters must typically: (1) furnish a
surety bond or similar security device;95 (2) satisfy minimum net worth
requirements;96 (3) maintain minimum levels of specified types of
permissible investments (e.g., government obligations and other low-risk
investments);97 (4) retain specified business records for statutorily
mandated periods of time;98 and (5) file annual and periodic reports relating
to financial condition and upon the occurrence of significant events.99 In
93. The primary purpose of requiring delivery of a surety bond (or other security), along with the
imposition of minimum net worth and minimum permissible investment levels, is to ensure that the
money transmitter has sufficient resources to honor its obligations to its customers. See UNIF. MONEY
SERV. ACT § 204, cmt., 7A U.L.A. 192–93 (2006); id. § 207, cmts. 1–2, 7A U.L.A. 196–97.
94. See, e.g., id. § 605, cmt. 1, 7A U.L.A. 192 (2006).
95. See, e.g., ARIZ. REV. STAT. ANN. §§ 6-1205(A), 6-1205.01 (2007) (imposing minimum
bonding and net worth requirements); COLO. REV. STAT. ANN. § 12-52-107(1)(a) (West 2010)
(requiring bond of $1,000,000, which may be decreased to no less than $250,000 based on financial
condition); CONN. GEN. STAT. ANN. §§ 36a-602, 36a-604 (West 2011) (imposing minimum bonding
and net worth requirements); D.C. CODE § 26-1007(a) (2001) (requiring that licensed money
transmitters furnish a surety bond of $50,000 plus $10,000 per each additional location, not to exceed
$250,000); KAN. STAT. ANN. § 9-509(b)(2)–(3) (Supp. 2012) (requiring deposit of cash or securities
with the state treasurer or an approved bank in the amount of $200,000 which can be increased to a
maximum of $500,000 depending on financial condition, or alternatively the delivery of a surety bond
in the same amount); UNIF. MONEY SERV. ACT § 204, 7A U.L.A. 192 (2006) (requiring that each
prospective licensee deliver a surety bond, letter of credit or similar security device in the amount of
$50,000 plus $10,000 for each additional location, not to exceed $250,000, when applying for a license,
and noting that the amount of security can be raised to a maximum of $1,000,000 if necessitated by the
licensee’s financial condition).
96. See, e.g., D.C. CODE § 26-1004 (requiring a minimum net worth, at all times, of not less than
$100,000 plus $50,000 for each additional location or authorized delegate, not to exceed $500,000);
KAN. STAT. ANN. § 9-509(b)(1) (requiring a minimum net worth, at all times, of not less than
$250,000); UNIF. MONEY SERV. ACT § 207, 7A U.L.A. 196 (2006) (requiring that each licensee
maintain a minimum net worth of at least $25,000).
97. See, e.g., CONN. GEN. STAT. ANN. § 36a-603; KY. REV. STAT. ANN. § 286.11-015(1)
(requiring a licensed money transmitter to maintain minimum permissible investments of no less than
the aggregate amount of all of its outstanding payment instruments).
98. See, e.g., KY. REV. STAT. ANN. § 286.11-029 (requiring licensed money transmitters to
maintain and preserve certain books and records for five years); MICH. COMP. LAWS ANN. § 487.1025
(West Supp. 2013) (requiring licensed money transmitters to maintain certain records for three years);
UNIF. MONEY SERV. ACT § 605, 7A U.L.A. 214–15 (2006) (requiring that each licensee maintain
extensive records for a period of three years).
99. See, e.g., FLA. STAT. ANN. § 560.118(2)(a) (West 2012) (requiring filing of annual financial
statements and quarterly reports); id. § 560.126 (requiring written notice of significant events); IOWA
CODE ANN. § 533C.205(2) (West 2011) (requiring submission of an annual renewal report); id.
§ 533C.503 (requiring filing of quarterly reports, and additional reports upon occurrence of certain
material changes and other specified events); UNIF. MONEY SERV. ACT § 206(b), 7A U.L.A. 195 (2006)
(requiring that each licensee submit a renewal report, including its audited annual financial statement,

addition, licensed money transmitters must open their business up for audit
and investigation by the regulatory agency overseeing compliance.100 Those
who fail to comply face administrative action with both criminal and civil
consequences, ranging from imprisonment to monetary penalties.101 In
addition to penalties under state law, federal laws regulating money
transmission make it a crime, punishable by a monetary penalty or
imprisonment, to operate as a money transmitter without complying with
applicable state licensing requirements.102
The regulatory implications of being subject to state money transmitter
laws can be onerous and costly. Licensees must not only bear the direct
costs of licensing and renewal, but also bear the expense of establishing a
program to ensure compliance with ongoing requirements such as
reporting. The state-specific nature of money transmitter laws only
increases the burden of compliance.
B. Federal Regulation of Money Transmission
While the primary thrust of this Article centers on state money

transmitter laws, a brief overview of federal regulation of money
transmission is both enlightening and useful. Federal regulation of money
transmission was enacted pursuant to the BSA.103 The requirements of the
BSA are set forth in the text of the BSA and in the implementing
or submit to an examination when requesting its annual license renewal); id. § 603, 7A U.L.A. 211–12
(requiring submission of reports following material changes); id. § 604, 7A U.L.A. 213–14 (2006)
(requiring that each licensee provide the state regulator with a notice and request for approval of any
proposed change in control); id. § 606, 7A U.L.A. 216 (requiring that each licensee file all necessary
reports under federal and state money laundering laws).
100. See, e.g., MD. CODE ANN., FIN. INST. §§ 12-421, 12-423, 12-424 (LexisNexis 2011)
(allowing the commissioner to require an audit by a certified public accountant and permission to
conduct an investigation of books and records or an on-site investigation); IOWA CODE ANN.
§ 533C.501(1) (West 2011) (giving the state regulator the right to conduct an annual examination);
UNIF. MONEY SERV. ACT §§ 601–02, 7A U.L.A. 210–11 (2006) (granting the state regulator authority
to conduct, at the licensee’s cost, an annual examination and additional examinations if the regulator
believes that the licensee is engaging in unsafe or unsound practices or is otherwise violating the
statute).
101. See, e.g., MD. CODE ANN., FIN. INST. § 12-429 (imposing a civil penalty of up to $1,000 for
the first violation of the Maryland money transmitter law and $5,000 for each subsequent violation); id.
§ 12-430 (classifying each knowing violation of the Maryland money transmitter law as a felony
punishable by imprisonment for up to five years and a criminal fine of $1,000 for the first violation and
$5,000 for each subsequent violation); UNIF. MONEY SERV. ACT § 803, 7A U.L.A. 224–25 (2006)
(granting the state regulator the power to issue cease and desist orders); id. § 804, 7A U.L.A. 225
(granting the state regulator the power to enter into consent orders to resolve any matters under the
Act); id. § 805, 7A U.L.A. 226 (granting the state regulator the authority to assess civil penalties of
$1,000 per day for each outstanding violation plus costs and attorneys fees); id. § 806, 7A U.L.A. 226
(imposing criminal penalties for certain intentional or knowing violations of the Act).
102. 18 U.S.C. § 1960 (2006).
103. See 31 U.S.C. § 5311; 31 C.F.R. §1010.100 (2012); see also FinCEN’s Mandate from
Congress, supra note 39.

regulations promulgated by the Financial Crimes Enforcement Network

(FinCEN), a bureau of the U.S. Department of the Treasury.104 The BSA
seeks to regulate financial institutions and other financial businesses by
requiring them to assist U.S. government agencies in detecting and
preventing money laundering.105 Accordingly, the purpose of the BSA is
distinct from the statutory purpose of state money transmitter laws because
the BSA is wholly unconcerned with protecting consumers from suffering a
monetary loss. Notwithstanding the divergent statutory purpose, there are
some similarities, including: (1) a broadly inclusive definition of money
transmission;106 (2) the requirement of registration with the proper
regulatory agency;107 and (3) the imposition of regulatory requirements,108
including civil and criminal penalties for noncompliance.109
1. The Definition of Money Transmission Under Federal Law
Like state money transmitter laws that require licensing, the BSA
requires money transmitters to register with the Secretary of the
Treasury.110 The regulated activity of money transmission is defined as a
component part of the term “financial institution.”111 The BSA itself simply
provides that the term “financial institution” includes any “licensed sender
of money or any other person who engages as a business in the
transmission of funds.”112 The implementing regulations of the BSA go a
step further and provide that the term “financial institution” includes any
money services business.113 Money transmitters are one of seven different

105. See FinCEN’s Mandate from Congress, supra note 39; see also Glenn R. Simpson, Easy
Money: Expanding in an Age of Terror, Western Union Faces Scrutiny — As Fund-Transfer System
Grows in Risky Parts of the World, U.S. Questions Oversight — How 9/11 Hijackers Got Paid, WALL
ST. J., Oct. 20, 2004, at A1, available at http://online.wsj.com/article/SB109823529279550190.html
(discussing how Western Union’s money transfer servicers were used to support terrorism and money
laundering).
106. See 31 C.F.R. §1010.100(ff).
107. See 31 U.S.C. § 5330 (requiring registration of all money transmitters); 31 C.F.R.
§ 1022.380 (requiring that all money transmitters register with FinCEN regardless of whether or not the
money transmitter is already licensed with any State).
108. Due to the BSA’s focus on detecting and preventing money laundering, the regulatory
compliance requirements naturally focus on reporting and record keeping. See, e.g., 31 U.S.C. § 5313
(requiring submission of reports in connection with certain transactions for the payment, receipt, or
transfer of United States coins, currency, or other monetary instruments); id. § 5326 (granting authority
for the federal regulator to impose additional recordkeeping requirements).
109. See 31 U.S.C. §§ 5321–22.
110. Id. § 5330; see also 31 C.F.R. § 1022.380.
111. See 31 U.S.C. § 5312(a)(2)(R).
112. Id.
113. See 31 C.F.R. § 1010.100(t)(3).

types of money services businesses.114 Money transmitters are broadly

defined in the implementing regulations as: (1) any person that accepts
“currency, funds, or other value that substitutes for currency from one
person and [transmits the same] to another location or person by any
means”;115 or (2) “[a]ny other person engaged in the transfer of funds.”116
Thus, the federal definition, like most state definitions, is broadly inclusive
and potentially encompasses any activity where a person accepts and then
transfers the money to another place or location.117 While traditional money
transfer businesses such as Western Union fall within this definition, a host
of other business models also appear to fit within the plain language of the
definition (e.g., couriers delivering money or monetary value, the delivery
of payments using an Internet-based systems such as PayPal).
2. Exemptions from Regulation Under Federal Law
Given the sweeping definition of money transmission and the use of a

facts-and-circumstances test to make the ultimate determination,118 a
potentially regulated person must look to the enumerated exemptions for
guidance.119 Like state money transmitter laws, the BSA excludes money
transmission by categories of persons already subject to regulatory
oversight, including banks and any person regulated by the Securities and
Exchange Commission or the Commodity Futures Trading Commission.120
However, while many state statutes have not yet modernized their money
transmitter statutes to address technological advances,121 the federal
regulations contain more robust exemptions.
The exemptions found in FinCEN’s implementing regulations show an
understanding of the potential for money transmitter laws to implicate a
host of electronic payment and delivery mechanisms. As such, the term
money transmitter does not include any person who only:
114. Currency dealers or exchangers, check cashers, issuer of traveler’s checks or money orders,
providers of prepaid access, money transmitters, the U.S. Postal Service, and sellers or prepaid access
all constitute money services businesses under the BSA’s implementing regulations. See 31 C.F.R.
§ 1010.100(ff)(1)–(7).
115. Id. § 1010.100(ff)(5)(i)(A).
116. Id. § 1010.100(ff)(5)(i)(B).
117. Id. §§ 1010.100(ff)(5)(i)(A), 1010.100(ff)(5)(ii); see also Bank Secrecy Act Regulations;
Definitions and Other Regulations Relating to Money Services Businesses, 76 Fed. Reg. 43585-01 (July
21, 2011) (codified at 31 C.F.R. pt. 1010, 1021 and 1022) (noting that there is no activity threshold
applicable to money transmitters).
118. 31 C.F.R. § 1010.100(ff)(5)(ii).
119. See id. § 1010.100(ff)(5)(ii)(A)–(F) (enumerating exclusions to the defined term “money
transmitter”); id. § 1010.100(ff)(8) (enumerating exclusions to the defined term “money services
business”).
120. Id. § 1010.100(ff)(8).
121. See UNIF. MONEY SERV. ACT, prefatory note, 7A U.L.A. 163–64 (2006).

(A) Provides the delivery, communication, or network access

services used by a money transmitter to support money
transmission services;
(B) Acts as a payment processor to facilitate the purchase of, or
payment of a bill for, a good or service through a clearance and
settlement system by agreement with the creditor or seller;
(C) Operates a clearance and settlement system or otherwise acts as
an intermediary solely between BSA regulated institutions. . . .
(D) Physically transports currency . . . or other value that
substitutes for currency as a person primarily engaged in such
business, such as an armored car, from one person to the same
person at another location or to an account belonging to the same
person at a financial institution, provided that the person engaged
in physical transportation has no more than a custodial interest in
the currency . . . or other value at any point during the
transportation;
(E) Provides prepaid access; or
(F) Accepts and transmits funds only integral to the sale of goods
or the provision of services, other than money transmission
services, by the person who is accepting and transmitting the
funds.122
Thus, federal law appears to take a more progressive approach toward

addressing the scope of regulation in light of technological advances in the
payments industry. In doing so, federal law specifically exempts any
person who simply provides a delivery mechanism that is used by a money
transmitter to effectuate the acceptance and transfer of money.123 As such,
providing the Internet service used by a money transmitter to accept and
transfer currency will not subject the internet service provider to regulation.
Federal law also appears to exempt the receipt and transfer of money in
certain specified situations, where the money transmission generally
supports the operation of a modern payment and financial system.124
Specifically, federal law exempts: (1) any seller who receive and transmit
money in connection with facilitating the sale of their products or
services;125 (2) any third party who acts as a payment processor by
accepting and transferring a payment in connection with facilitating a
purchase via an agreement with the seller;126 and (3) any provider of stored
122. 31 C.F.R. § 1010.100(ff)(5)(ii)(A)–(F).

123. Id. § 1010.100(ff)(5)(ii)(A).
124. See id. § 1010.100(ff)(5)(ii)(B)–(F).
125. Id. § 1010.100(ff)(5)(ii)(F).
126. Id. § 1010.100(ff)(5)(ii)(B).

value regardless of whether the system is open-loop or closed-loop.127

Therefore, federal money transmitter laws have outpaced state law
counterparts when it comes to incorporating exemptions to clarify the
scope of regulation as applied to new payment technologies.
3. Compliance Requirements Under Federal Law
Absent an exemption, any person that constitutes a money transmitter

under the BSA must be registered128 and comply with additional regulatory
requirements. Given the focus on detecting and preventing money
laundering, the BSA foregoes regulation focused on financial security in
favor of comprehensive reporting and recordkeeping obligations.129 Reports
must be filed after the occurrence of certain events.130 Reportable events
include: (1) any transaction in currency in excess of $10,000;131 (2) any
instance where currency in excess of $10,000 is physically transported
from abroad into the United States or vice versa;132 and (3) the occurrence
of any other suspicious transaction.133 Money transmitters must also
comply with the recordkeeping requirements set out in Subpart D of 31
C.F.R. § 1010 by both making and maintaining appropriate records in
connection with certain transactions.134 While federal money transmitter
regulation does not impose obligations to provide surety bonds and similar
financial security devices or involve the burdens of compliance with
differing rules across jurisdictions, federal regulation does nonetheless
impose arduous recordkeeping and reporting requirements.
II. THE POTENTIALLY EXPANSIVE REACH OF REGULATION
The sweeping statutory definition of money transmission under state

law and the relative lack of exemptions lead to practical problems for any
person that is engaged in any activity that involves the receipt of money or
a payment for transfer to another person or location. Under state law,
money transmission can be reasonably interpreted as extending far beyond
traditional money transfer businesses like Western Union who are primarily
engaged in the business of taking possession of and delivering money on
127. Id. § 1010.100(ff)(5)(ii)(E).

128. See 31 U.S.C. § 5330 (2006); 31 C.F.R. § 1022.380.
129. See 31 C.F.R. § 1010.300.
130. Id. §§ 1010.306, 1010.310–.311, 1010.320, 1010.330, 1010.340, 1010.350, 1010.360,
1010.370.
131. Id. §§ 1010.310–.314, 1022.310–.314.
132. Id. § 1010.340.
133. Id. §§ 1010.320, 1022.320.
134. Id. § 1010.400.

behalf of consumers.135 While the extension of money transmitter laws to

new ways of providing money transfer services (e.g., Western Union’s use
of the Internet to accept and transfer money on behalf of consumer
customers), money transmitter laws potentially encompass everything from
bike messengers delivering a check to any number of Internet and mobile
payment services that take payment information from a buyer and deliver
payment to the merchant seller.136 In both cases, the service provider is
taking what amounts to money or monetary value under statute (e.g., the
check or the credit/debit card information) and transferring it to another
person.
A. Traditional Money Transfer Businesses
The definition of money transmission clearly covers traditional money

transfer businesses like Western Union.137 Since there is little doubt that
state money transmitter laws regulate such enterprises, money transfer
businesses have historically applied for licenses and conformed to the
requirements imposed by money transmitter laws.138 Money transfer
businesses like Western Union provide various money transfer services to
consumer and business customers.139 As a general matter, customers
engage the money transfer business to take possession of funds, which are
provided by the customer, and deliver the funds to a person designated by
the customer who is located in another city, state, or country.140 The money
135. See, e.g., United States v. Cambio Exacto, S.A., 166 F.3d 522, 524–25 (2d Cir. 1999)
(describing money transmitters in the traditional sense as an entity in the “business of sending money:
collecting it from customers and, for a commission, delivering it to a designated recipient, typically in
another country” and describing the process by which such transfer occurs as involving reliance “on
independent agents at both ends of each transaction.” Specifically, “[c]ustomers give local agents the
money they want sent; the agents then notify the money transmitter of the transaction and deposit the
funds to be transferred in the transmitter’s bank account. Similarly, to physically turn over the funds to
the recipient, money transmitters use entities doing business in the recipient’s vicinity. When
performing that function, they are known as correspondents. To expedite the delivery process,
correspondents sometimes distribute funds to the recipients before the amount actually arrives from the
money transmitter.”).
136. See infra Part II.A–C.
137. See About Us, W. UNION, http://corporate.westernunion.com/about.html (last visited
October 1, 2013) (describing the money transfer services provided by Western Union to its customers).
138. See State Licensing, W. UNION, http://ir.westernunion.com/investor-relations/corporate-
governance/state-licensing/default.aspx (last visited October 1, 2013) (listing the various state money
transmitter licenses that Western Union currently holds).
139. See Business Solutions, W. UNION, http://business.westernunion.com/ (last visited Oct. 1,
2013) (discussing business solutions provided by Western Union); W. UNION,
http://www.westernunion.com/home (last visited Oct. 1, 2013) (discussing consumer services provided
by Western Union).
140. See Foreign Exchange Business Solutions, W. UNION,
http://business.westernunion.com/overview/ (last visited Oct. 1, 2013) (describing how businesses can
send payments to suppliers); Send Money Online, WESTERN UNION, http://www.westernunion.com/
us/send-money/send-money-online.page? (last visited Oct. 1, 2013) (describing how consumer can send

transfer business plainly receives and transfers money to another location

or person as a service provider for the customer. In exchange for this
service, the money transfer business is paid a fee by the customer.141 Thus,
traditional money transfer businesses clearly fall within the scope of
regulation.
Originally, money transfers were accomplished via a wire transfer
through an intercontinental telegraph system, which required that a
customer physically go to a telegraph office to deliver the funds for
transfer.142 Likewise, the customer’s designated recipient was forced to
travel to a telegraph office to receive the funds.143 While customers can still
travel to a physical location to make a money transfer,144 technological
advances have expanded the available delivery mechanisms. Customers can
now initiate a money transfer over the phone or on the Internet.145 Instead
of delivering physical currency, the customer provides the functional
equivalent in the form of credit/debit card information or bank account
information to the money transfer business, which electronically transfers
the value to the customer’s designated recipient.146 Notwithstanding
changes in the way that money transfers may be accomplished, the broadly
inclusive nature of state money transmitter laws, which explicitly govern
transfers by “any means,” rightfully allows for the continued regulation of
new ways of providing the same old money transfer services.147
B. Incidental Money Transfer
While the breadth of state money transmitter laws appropriately allows

for the regulation of traditional money transfer businesses along with new
money). But see Get More from Your Billing & Payment Strategy, W. UNION,
http://payments.westernunion.com/ (last visited Oct. 1 2013) (describing how Western Union now
offers payment services to business which facilitates the receipt and delivery of payments from
customers to the business).
141. See supra note 140; see also Compare and Price Western Union Services, W. UNION,
https://wumt.westernunion.com/WUCOMWEB/shoppingAreaAction.do?method=load&nextSecurePag
e=Y&ShoppingType=2 (last visited Oct. 1, 2013) (describing pricing for certain Western Union
services).
142. See Salil K. Mehra, Paradise is a Walled Garden? Trust, Antitrust, and User Dynamism, 18
GEO. MASON L. REV. 889, 941 (2011) (discussing the development of Western Union’s telegraph based
money transfer system); Eric G. Roscoe, Taxing Virtual Worlds: Can the IRS PWN You?, 12 U. PITT. J.
TECH. L. & POL’Y 1, 28 (2011) (noting that the way to wire money historically was to wire it through
Western Union).
144. Send Money in Person, W. UNION, http://www.westernunion.com/us/send-money-in-person
(last visited Oct. 1, 2013).
145. See Send Money by Phone, W. UNION, http://www.westernunion.com/send-money-by-phone
(last visited Oct. 1, 2013); Send Money Online, W. UNION, http://www.westernunion.com/send-money-
online (last visited Oct. 1, 2013).

ways of providing the same service,148 the definition of “money

transmission” also implicates other enterprises that may only be involved in
the receipt and transfer of money as an incidental part of its primary
business. For example, the U.S. Postal Service, United Parcel Service,
Federal Express, couriers, bike messengers, and others are primarily
involved in providing delivery services to customers. Nonetheless,
customers may on occasion request delivery of packages that contain
currency or other monetary value such as checks, money orders, and gift
cards. Because the service provider receives remuneration for the delivery,
the service could be deemed the business of receiving money for the
purpose of transferring it to another person or location.149 While most states
exempt the U.S. Postal Service,150 few states provide an exemption
applicable to delivery services generally.151 Moreover, state money
transmitter laws typically do not contain a minimum activity threshold
before regulation is triggered or otherwise limit regulation to those who
have actual knowledge that money is being transported.152 As such, the
breadth of the statute and the lack of clearly applicable exemptions leave
couriers and other delivery services that may only occasionally deliver
money within the plain language of the statute’s regulatory scope. The
foregoing is illustrative of the potential applicability of state money
transmitter laws to business models other than the money transfer
businesses that have historically been regulated.
C. New and Emerging Payment Systems
While the broadly inclusive nature and lack of applicable exemptions

has potential implications for delivery services and other businesses that
occasionally engage in money transfers, no business sector is more
impacted than the burgeoning Internet and mobile payment services
industry. The adoption of new technology has changed the way that
consumers and businesses send and receive payments in connection with
the purchase and sale of goods and services. Increasingly, commerce is
shifting from a paper-based payment system reliant on cash and checks to
electronic modes of payment.153 Credit cards and debit cards have to some
148. See supra Part II.A.

149. See supra Part I.A.1.
150. See, e.g., GA. CODE ANN. § 7-1-681 (2013).
151. See, e.g., HAW. REV. STAT. § 489D-4 (2012).
152. See, e.g., WASH. REV. CODE ANN. §§ 19.230.020, 19.230.030 (West 1961) (defining money
transmission without reference to minimum activity requirements and not providing an explicit
exemption for incidental money transmission).
153. See Robert J. Samuelson, The Vanishing Greenback, NEWSWEEK, June 25, 2007, at 35.

degree replaced paper currency.154 Gift cards have to some degree replaced
paper gift certificates.155 Consumers can send electronic payments through
a variety of providers over the Internet in lieu of sending a check.156 The
advent of mobile payment systems has also enabled the use of smartphones
as a payments mechanism.157 While the business models and functionalities
differ, all of the following arguably involve the receipt of money or a
payment by a third-party service provider for ultimate delivery to an
independent seller of goods or services in connection with concluding a
purchase and sale transaction: (1) the provision of stored value and gift
cards; (2) the provision of payment processing services for third-party sales
on a hosted marketplace like the Amazon Marketplace and various mobile
application stores; (3) the provision of shopping cart or check-out
functionality, such as PayPal or Google Checkout, for use by a merchant
seller in connection with website sales; (4) the provision of mobile wallets,
such as Google Wallet and LevelUp, that give merchant sellers the ability
to accept payment information from a customer’s smartphone; and (5) the
provision of hardware and related mobile payment processing services,
such as Square and LevelUp, which give merchants the ability to use their
own smartphone to accept credit/debit card payments. While some states
have started to address the scope of money transmitter laws with respect to
stored value,158 few states have adopted exemptions applicable to new
Internet and mobile payment systems, leaving the question of scope
undefined and such services potentially subject to regulation.159
1. Stored Value and Gift Cards
Given the potential costs of regulation as a licensed money transmitter,

providers of stored value were quick to raise concerns about the lack of
154. See Catherine New, Cash Dying as Credit Card Payments Predicted to Grow in Volume:
Report, HUFFINGTON POST (June 7, 2012), http://www.huffingtonpost.com/2012/06/07/credit-card-
payments-growth_n_1575417.html.
155. See FEDERAL RESERVE, supra note 1 (discussing prepaid stored value as a replacement for
paper-based payment instruments).
156. See infra Part II.C.2–3.
157. See infra Part II.C.4–5.
158. See, e.g., WASH. REV. CODE ANN. §§ 19.230.010(6), 19.230.020(12) (West 1961)
(providing a limited exemption for stored value). But see NEV. REV. STAT. ANN. §§ 671.010,
671.040(1) (LexisNexis 2009) (regulating the issuance and sale of checks and the receipt of money
transmission without any explicit mention of applicability to stored value).
159. In promulgating the Uniform Money Services Act, NCCUSL noted that for many states, the
uniform act would “provide a new approach to the treatment of stored value and electronic currency at
the state level.” See UNIF. MONEY SERV. ACT, prefatory note, 7A U.L.A. 163–64 (2006). Even in states
that have adopted the uniform act, technology continues to outpace regulation. The uniform act was
drafted in 2004 and while it clarifies, to some degree, the treatment of stored value and internet
payments, the question of applicability to newer business models such as mobile payments remains
unclear. Id.

clarity regarding whether state money transmitter statutes actually applied

to prepaid products.160 The issuer of a gift card, for example, receives
money from the person purchasing the gift card. An accounting of the
amount paid is then loaded onto the gift card and stored electronically,
which allows the holder to use the card to make purchases from any
merchant who will accept it as a form of payment. As such, the issuer of
the card could be construed as engaging in money transmission by
receiving money from the person purchasing the card for the purpose of
providing a mechanism (the gift card) that transfers money when the card is
used to make a purchase from another place or location.
Because of confusion in the marketplace about whether issuers of
stored value were required to become licensed money transmitters, a
number of states attempted to clarify the question. States that have
addressed the question generally exempt issuers of stored value in a
“closed-loop” system where a merchant issues a card that can only be
redeemed for goods or services sold by the merchant issuing the gift card
(e.g., a gift card issued by Wal-Mart that can only be used to make
purchases from Wal-Mart).161 In contrast, stored value in an “open-loop”
system can be used to make purchases at many different merchants (e.g.,
prepaid debit cards issued by Visa that can be used at any merchant who
accepts Visa or a mall gift card that can be used at any merchant located in
the mall).162 Although exemptions for issuers of stored value are not
available in all states,163 it appears that the issuers of “closed loop” stored
value may be exempt in certain jurisdictions while issuers of “open loop”
remain potentially subject to regulation.164
160. See FEDERAL RESERVE, supra note 1.

161. See, e.g. ARIZ. REV. STAT. ANN. § 6-1201(11), (13) (2007) (excluding instruments
redeemable by the issuer in merchandise or services from regulation); CONN. GEN. STAT. ANN.
§ 36a-596(1), (7), (14) (West 2011); D.C. CODE § 26-1001(5), (10), (12) (2001); FLA. STAT. ANN.
§ 560.103(11), (15) (West 2012); HAW. REV. STAT. § 489D-4 (2012); IDAHO CODE ANN.
§ 26-2902(11), (13) (2000); 205 ILL. COMP. STAT. ANN. § 657/5 (West 2007); IND. CODE ANN.
§ 28-8-4-3.5, 13, 15, 19.5 (West 2010); IOWA CODE ANN. § 533C.102(15), (17) (West 2011); KAN.
STAT. ANN. § 9-508(c), (e), (g), (j) (Supp. 2012); KY. REV. STAT. ANN. § 286.11-003(7), (16), (22),
(28) (LexisNexis Supp. 2010); ME. REV. STAT. ANN. tit. 32, § 6102(10), (12) (1999); MD. CODE ANN.,
FIN. INST. § 12-401(l), (n), (p) (LexisNexis 2011); MICH. COMP. LAWS ANN. § 487.1003(c), (e), (i)
(West Supp. 2013); MINN. STAT. ANN. § 53B.03(07), (13), (15) (West 1946); N.H. REV. STAT. ANN.
§§ 399-G:1(IX), (XIV), 399-G:4 (LexisNexis 2011). But see LA. REV. STAT. ANN. § 6:1032(5) (2005)
(regulating the sale and issuance of stored value without any exclusions).
162. See Eniola Akindemowo, Contract, Deposit or E-Value? Reconsidering Stored Value
Products for a Modernized Payments Framework, 7 DEPAUL BUS. & COM. L.J. 275, 281 (2009).
164. Id.

2. Online Marketplaces and App Stores
While states have started to address the question of whether state

money transmitter laws regulate stored value, much less progress has been
made toward modernizing such statutes to account for online marketplaces
and mobile applications.165 Money transmitter regulation is potentially
implicated when a person: (1) hosts an online marketplace or mobile
application store where merchants gather to sell their products; and (2)
provides payment processing services to the merchants in connection with
sales made. Such a service arguably falls within the scope of money
transmitter regulation because the service provider is receiving credit/debit
card payment information from customers who wish to make a purchase
and subsequently facilitates delivery of the payment to the merchant selling
the product. 166
For example, the Amazon Marketplace is a hosted site where
merchants congregate to peddle their wares on Amazon.com167 to over 4
million unique daily visitors.168 Amazon is not the seller, but instead acts as
a service provider to facilitate sales by independent merchants. The
merchant agrees to pay Amazon a fee, which may include a monthly
subscription fee, a referral fee equal to a percentage of the sale price, and
for certain types of products, a fixed fee per item.169 In exchange, Amazon
allows the merchant to sell on Amazon.com and handles all of the payment
processing and settlement for the merchant’s sales.170 In doing so, Amazon
acts on behalf of the merchant, accepting payments from the merchant’s
customers (usually via a credit or debit card), and subsequently settling
with the merchant for all sales made through the marketplace by paying the
merchant an amount equal to the purchase price less any applicable fees.171
Thus, the providers of online marketplaces like the Amazon Marketplace

166. See e.g., MD. CODE ANN., FIN. INST. § 12-401(l).
167. Sell on Amazon, AMAZON, http://www.amazonservices.com/content/sell-on-
amazon.htm?ld=AZSOAMakeM#!how-it-works (last visited Sept. 30, 2013); see also Allison Howen,
Getting Started Selling on Amazon, WEBSITE MAGAZINE (Jan. 30, 2012),
http://www.websitemagazine.com/content/blogs/posts/archive/2012/01/30/getting-started-selling-with-
amazon.aspx; Kelly K. Spors, How to Sell on Amazon and eBay, N.Y. TIMES (Dec. 2, 2009),
http://www.nytimes.com/2009/12/03/business/smallbusiness/03marketplaces.html?pagewanted=all&_
moc.semityn.www.
168. WEBSITE STATISTICS, http://stats.website.org/amazon.com (last visited Sept. 30, 2013).
169. Start Selling Online—Fast, AMAZON, http://www.amazonservices.com/sell-on-
amazon/media-fees.htm (last visited Oct. 1, 2013).
170. See Sell on Amazon, AMAZON SERVICES, http://www.amazonservices.com/content/sell-on-
amazon.htm/ref=footer_soa?ld=AZFSSOA (last visited Oct. 1, 2013).
171. See Sell on Amazon: Frequently Asked Questions, AMAZON, http://www.
amazonservices.com/selling-on-amazon/faq.htm (last visited Aug. 28, 2013) (noting that Amazon
settles with the merchant every 14 days and describing the pricing options available for sellers who
wish to sell on Amazon).

arguably accept money in the form of payment card information from the
customer for the purpose of delivering to another place or location—to the
banks processing the transaction and ultimately to the merchant.
Mobile application stores are similarly susceptible to being covered by
the plain language of state money transmitter laws. While Apple, Android,
Samsung, T-Mobile, and many others manufacture and sell smartphones on
different mobile platforms, they often rely on independent software
developers to create apps for use on those smartphones.172 Everything from
games like Angry Birds to photo sharing apps like Instagram is sold via
various online and mobile app stores specific to a particular mobile
platform like Apple’s iOS.173 Customers who wish to buy an app pay
(usually via credit/debit card or acceptance of a charge to the customer’s
monthly phone bill) the operator of the app store (e.g., Apple).174 After
receiving payment from the buyer, the app store operator settles with each
developer by paying them the purchase price for all of the apps that have
been sold minus any applicable transaction fees owed.175 Like the operator
of an online marketplace, the app store operator could be construed as an
intermediary who receives payment from buyers on behalf of the
developer-seller in connection with the sale of the app, ultimately
transferring such payment to the developer-seller. Therefore, like online
marketplaces, the activities of app store operators may satisfy the technical
definition of money transmission under state law. While such an outcome
may seem patently ridiculous in what could be analogous to a
reseller/distributor scenario, the application of the broadly inclusive statute
and the plain language test advanced by some regulators highlights the
potentially wide-ranging types of business models that may be impacted.
172. See David Streitfeld, As Boom Lures App Creators, Tough Part Is Making a Living, N.Y.
TIMES (Nov. 17, 2012), http://www.nytimes.com/2012/11/18/business/as-boom-lures-app-creators-
tough-part-is-making-a-living.html?pagewanted=all&_r=0 (describing how independent developers
create and distribute apps); Jenna Wortham, The iPhone Gold Rush, N.Y. TIMES (Apr. 3, 2009),
http://www.nytimes.com/2009/04/05/fashion/05iphone.html?pagewanted=all (describing the successful
development and distribution of the iShoot app by Ethan Nicholas, an independent app developer); see
also Android Developers, ANDROID, http://developer.android.com/index.html (last visited Sep. 3, 2013)
(providing information to independent developers who wish to design apps for Android).
173. See Doug Aamoth, 50 Best iPhone Apps 2012, TIME (Feb. 8, 2012),
http://techland.time.com/2012/02/15/50-best-iphone-apps-2012/#slide/all/?&_suid=136096495559102
1777601781511185; see also Joanna Sibilla Taatjes, Note, Downloading Minimum Contacts: The
Propriety of Exercising Personal Jurisdiction Based on Smartphone Apps, 45 CONN. L. REV. 357, 361–
62 (2012) (noting that apps are downloaded from an app store hosted by the maker of the smartphone).
174. See, e.g., ANDROID, supra note 11 (describing payment options for customers who wish to
buy apps).
175. See, e.g., Android Developer—Transaction Fees, GOOGLE PLAY,
http://support.google.com/googleplay/android-developer/answer/112622?hl=en&ref_topic=15867 (last
visited Aug. 28, 2013) (providing for monthly payouts and noting that the developer receives 70% with
the remaining 30% of the purchase price going to the distribution partner and to pay operating fees).

3. Shopping Carts and Checkout Services
States have also neglected to update money transmitter laws to clarify

the scope of regulation with respect to third-party service providers who
operate the checkout and payment process for a merchant website.176 Even
though a customer may visit the merchant’s website instead of a hosted
marketplace, money transmitter regulation is potentially implicated where a
third party such as PayPal,177 Google,178 or Amazon179 operates the
“shopping cart” or “check out” function for the merchant website, or where
the merchant directs the customer to pay using a third-party service.180 In
such situations, the service provider (not the merchant) receives and
processes the customer’s payment in connection with ultimately facilitating
the transfer of the payment to the merchant seller.
Services such as PayPal, Google Checkout, and Checkout by Amazon
allow merchants to integrate a shopping cart or checkout function with the
merchant’s website so that a customer can make a payment directly from
the merchant’s website.181 To make a purchase, customers typically initiate
payment by selecting a button on the merchant’s website, which directs the
customer to provide payment information to the service provider to
conclude the purchase.182 As such, the service provider accepts the payment
from the buyer on behalf of the merchant, subsequently transferring the
payment to the merchant less any applicable fees.183 In addition, many
service providers simply give merchants the ability to send invoices and
direct customers to make a payment through the service provider (e.g., a
seller on eBay directing the winning bidder to pay through PayPal).184
Given the broadly inclusive definition of “money transmission,” checkout
services and merchant-facing payment services offered by PayPal,
Amazon, Google and others like them could all reasonably be interpreted
as falling within the ambit of regulation unless a valid exemption applies.
176. See supra Part II.A.1–2.

177. See Merchant Services, PAYPAL, https://www.paypal.com/us/webapps/mpp/merchant (last
visited Sept. 30, 2013).
178. See Google Checkout, GOOGLE, https://checkout.google.com/seller/integrate.html (last
visited Sept. 30, 2013).
179. See Checkout by Amazon, AMAZON, https://payments.amazon.com/sdui/sdui/business/cba
(last visited Sept. 30, 2013); Viewing Orders, AMAZON, https://payments.amazon.com/sdui/
sdui/helpTab/Checkout-by-Amazon/Managing-Orders/Viewing-Orders (last visited Sept. 30, 2013).
180. See Free Invoice Template, PAYPAL, https://www.paypal.com/webapps/mpp/free-invoice-
template (last visited Sep. 3, 2013) (allowing sellers to send electronic invoices to customers requesting
payment via PayPal); How to Sell Online, PAYPAL, https://www.paypal.com/webapps/mpp/how-to-sell-
online (last visited Sept. 30, 2013).
181. See supra notes 177–179.
182. See, e.g., Checkout by Amazon, AMAZON, supra note 179 (illustrating the payment process).
183. Id.
184. See How to Sell Online, PAYPAL supra note 180.

4. Mobile Wallets and Mobile Payment
Like the payment innovations discussed above, mobile wallets and

other mobile payment platforms, which allow consumers to use their
mobile devices to make payments, could be construed as money
transmission. Where a third party provides the application that enables a
customer’s mobile device to store payment information and the hardware
that allows a merchant to accept a customer payment via the mobile device,
money transmission regulation is potentially implicated because a third
party arguably receives the payment and facilitates transfer of the payment
to the merchant-seller.
Some examples of mobile commerce platforms that may constitute
money transmission under state law include Google Wallet,185 Isis,186
Square Wallet,187 and LevelUp.188 In addition, Merchant Customer
Exchange is in the process of developing a merchant-owned mobile
payment platform for participating merchants.189 While the business models
differ, each mobile payment platform essentially allows a participating
merchant to accept payment from a customer’s enabled mobile device.
When making a purchase, the customer simply uses his or her smartphone
to transmit the credit/debit card information to an in-store terminal or
scanner. 190 In each case, the operator of the mobile payment platform
185. See Google Wallet, GOOGLE, supra note 6.

186. See Olga Kharif & Scott Moritz, Isis Mobile-Payment System to Debut in September After
Delays, BLOOMBERG (Aug. 28, 2012, 2:00 PM), http://www.bloomberg.com/news/2012-08-28/isis-
mobile-payment-system-to-debut-in-september-after-delays.html; Learn how to Pay and Save with Isis,
ISIS, http://www.paywithisis.com/how.html (last visited Sept. 27, 2013) (describing how Isis allows a
phone to be used for payment). At present, only certain merchants in Austin, TX and Salt Lake City,
UT are capable of accepting in-store payments via Isis. See Kharif & Moritz, supra.
187. See Square Wallet, SQUARE, https://squareup.com/wallet (last visited Oct. 1, 2013)
(describing the functionality of Square as a mobile payment service); Willy Staley, Starbucks and
Square Announce Partnership: But Will Mobile Wallets Work Outside Coffee Shops?, MY BANK
TRACKER (Aug. 8, 2012), http://webcache.googleusercontent.com/search?q=cache:http://www.
mybanktracker.com/news/2012/08/08/starbucks-square-announce-partnership-mobile-wallets-work-
coffee-shops/.
188. See Brian X. Chen, LevelUp Tries Dropping the Transaction Fee for Mobile Payments, N.Y.
TIMES BITS BLOG (Jul. 12, 2012, 9:00 AM), http://bits.blogs.nytimes.com/2012/07/12/levelup-zero-
scvngr/; LEVELUP, https://www.thelevelup.com/ (describing LevelUp’s mobile payment app).
189. See Juhi Arora, Merchant Customers Exchange: Wal-Mart, Target, 7-Eleven, Other Big
Retailers May Take to Mobile Payments, HUFFINGTON POST (Aug. 15, 2012, 9:09 AM),
http://www.huffingtonpost.com/2012/08/15/merchant-customers-exchange_n_1777791.html;
MERCHANT CUSTOMER EXCHANGE, http://www.mcx.com/ (last visited Sept. 15, 2013); Jenn Webb,
Commerce Weekly: More Brands Throw in with Merchant Customer Exchange, O’REILLY (Oct. 4,
2012), http://radar.oreilly.com/2012/10/merchant-customer-exchange-lemon-qr-codes.html.
190. See, e.g., Mark Hachman, Isis Carrier Venture Signs Payment Deals with Visa, MasterCard,
Others, PCMAG.COM (Jul. 19, 2011, 1:49 PM), http://www.pcmag.com/article2/0,2817,2388712,00.asp
(describing Isis’ use of an NFC terminal to obtain payment information from the customer’s phone);
Google Wallet, GOOGLE, http://www.google.com/wallet/shop-in-stores/ (last visited Sept. 27, 2013)
(describing Google Wallet’s use of an NFC terminal to obtain payment information from the customer’s
phone); Olga Kharif, AT&T-Verizon-T Mobile Sets $100 Million for Google Fight: Tech, BLOOMBERG

could be deemed to be receiving money in the form of payment

information from the buyer for the sole purpose of delivering it to the
merchant seller.
5. Mobile Card Readers
One final innovative payment business model deserves mention due to

the relative speed of its acceptance in the marketplace and its potential for
falling within the scope of money transmitter regulation. The advent of
mobile credit/debit card readers has allowed merchants to eschew the
terminals provided by the credit card associations in favor of a scanner
attached to the merchant’s mobile device, which allows the merchant to
swipe a customer’s credit/debit card for payment.191 Such devices along
with the related apps effectively allow a merchant to transform its mobile
device into a cash register.192 Examples include Square, Inc.’s card reader,
Square Register (launched in 2010 by Twitter co-founder Jack Dorsey and
Jim McKelvey),193 and PayPal’s more recent introduction of the PayPal
Here card reader.194 Both services arguably involve the receipt of money
from a buyer in the form of credit/debit card information for the purpose of
payment processing and ultimately the transfer of such funds to the
merchant making a sale. Like many of the other payment systems discussed
above, Square Register and PayPal Here operate as a kind of third-party
intermediary that receives and delivers the purchase price in connection
with a purchase and sale transaction between an independent buyer and
BUSINESSWEEK (Aug. 29, 2011), http://www.businessweek.com/news/2011-08-29/at-t-verizon-t-

mobile-sets-100-million-for-google-fight-tech.html; LEVELUP, supra note 13 (describing LevelUp’s use
of a unique code and scanner system to transfer payment information); Staley, supra note 187
(discussing Square Wallet’s use of GPS technology to transmit payment information).
191. See Paypal Here, PAYPAL, https://www.paypal-promo.com/here/#welcome (last visited
Sept. 15, 2013) (describing the PayPal Here scanner and app); Square Reader, SQUARE,
https://squareup.com/reader (last visited Aug. 28, 2013); Square Register, SQUARE,
https://squareup.com/register (last visited Sept. 15, 2013) (describing the Square Register scanner and
app).
193. Courtney Boyd Myers, Square Nearing $1 Billion in Processed Payments Since Launch,
THE NEXT WEB (May 25, 2011, 5:53 PM), http://thenextweb.com/gadgets/2011/05/25/square-nearing-
1-billion-in-processed-payments-since-launch/Eric Savitz; Jack Dorsey: Leadership Secrets of Twitter
and Square, FORBES (Oct. 17, 2012, 9:00 AM), http://www.forbes.com/sites/ericsavitz/2012/10/17/
jack-dorsey-the-leadership-secrets-of-twitter-and-square/3/.
194. See Cliff Kuang, PayPal Launches PayPal Here, a Competitor to Square Designed by Yves
Behar, FAST COMPANY (Mar. 15, 2012, 9:15 PM), http://www.fastcodesign.com/1669277/paypal-
launches-paypal-here-a-competitor-to-square-designed-by-yves-behar#1 (noting that PayPal Here was
announced on March 15, 2012); Paypal Here, PAYPAL, https://www.paypal.com/webapps/mpp/credit-
card-reader (last visited Sept. 15, 2013); Emily Price, PayPal Takes on Square, Launches ‘PayPal
Here’ Credit Card Reader, MASHABLE (Mar. 15, 2012), http://mashable.com/2012/03/15/paypal-takes-
on-square-launches-paypal-here-credit-card-reader/.

seller. Thus, in the absence of clearly applicable exemptions, the service

could be deemed money transmission under state law.
III. THE ADVERSE IMPACT OF UNCERTAINTY ON THE PAYMENT INDUSTRY
Uncertainty abounds regarding the scope of regulation under state

money transmitter laws because of the broadly inclusive definition of what
constitutes money transmission and the existence of few statutory
exemptions.195 As discussed above, a host of activities other than traditional
money transfer services potentially falls within the plain language of
regulation.196
While some states have recognized the need for re-evaluation and
clarification of money transmitter laws in light of innovations such as
stored value,197 far less certainty exists for the providers of other new and
emerging payment services.198 Nonetheless, the rise of Internet and mobile
payment services evokes similar questions and calls for increased clarity.199
In the absence of certainty, those who provide such services face increased
transaction costs. As a result, the unsettled legal and regulatory framework
has the potential to stifle ongoing payment innovation.
A. Transaction Costs
The uncertain scope of regulation needlessly increases the search and

information costs of any person that currently provides a potentially
regulated service or wishes to bring one to market. At present, any person
that receives money or monetary value and transfers that money or
monetary value to another person or location must evaluate whether his or
her actions constitute money transmission under differing state laws.200 An
array of Internet and mobile payment services currently in widespread use
and those that are still in development effectively involve the receipt of
money by person A (a service provider) from person B (a consumer) for the
195. See Mariani, supra note 30; Hurh & Luce, supra note 30; Thomas, supra note 30.
196. See supra Part II.
197. See supra Part II.C.
199. In addition to the outcry over the lack of certainty and consistency in the application of state
money transmitter laws to Internet and mobile payment products, it should be noted that some have
challenged the constitutionality of such state statutes. See Complaint at 4, Think Computer Corp. v.
Venchiarutti, No. CV 11-05496 HRL, 2011 WL 7941050, at *4 (N.D. Cal. Nov. 14, 2011), available at
ia600805.us.archive.org/15/items/gov.uscourts.cand.247574/gov.uscourts.cand.247574.1.0.pdf
(challenging the constitutionality of the 2010 California Money Transmission Act). While questions of
constitutionality are beyond the scope of this Article, the wide-ranging impact of state money
transmitter laws on a system of modern commerce utilizing Internet and mobile payments is highlighted
by the Think Computer Corporation lawsuit.
200. See Hogan, supra note 30; Mariani, supra note 30.

purpose of transferring it to person C (e.g., a seller).201 Given the lack of

clearly applicable exemptions in each state,202 potentially regulated
payment service providers are left to navigate an ambiguous legal and
regulatory environment when determining whether they are subject to
money transmitter laws and perhaps more importantly whether a state
regulator enforcing the statute will interpret the scope similarly.203 As such,
potentially regulated payment service providers must wrestle with several
wholly undesirable options—either: (1) obtain a money transmitter license
and bear the cost of implementing a regulatory compliance program to
mitigate the risk of potential regulation and penalties for noncompliance;204
(2) forego licensing and risk the possibility of penalties in the event that a
regulator ultimately deems that the person is in fact a money transmitter,205
or (3) stop development or provision of any potentially regulated activity
until greater certainty exists.206 Furthermore, the lack of consistency
between jurisdictions compounds the problem. Those that operate in
multiple states must engage in the same futile exercise of attempting to
discern the applicability of each state-specific regulatory regime, including
any available exemptions. In the end, it is the potentially regulated person
201. See supra Part I; see also CAL. FIN. CODE § 2003(o) (West 2013) (broadly defining money
transmission); Thomas, supra note 30 (discussing the use of a plain-English test).
203. See Mariani, supra note 30; Andrea Lee Negroni, Risky Business: State Regulation of Money
Transmitters, CLEAR NEWS (Spring 2003), http://www.goodwinprocter.com/~/media/Files/Publications/
Attorney%20Articles/2003/Risky_Business_State_Regulation_of_Money_Transmitters.ashx
(describing PayPal’s struggle with money transmission regulation, evolving from an assumption that
their business model was unregulated to obtaining state money transmitter licenses in numerous
jurisdictions); Thomas, supra note 30.
204. See Sean Sposito, Facebook Fast-Tracks Its Payments Business, AMERICAN BANKER (Feb.
21, 2012, 3:09 PM), http://www.americanbanker.com/issues/177_35/facebook-credits-money-
transmitter-license-bank-regulation-1046825-1.html (noting that Facebook has recently become
licensed under several state money transmitter laws). Even though Facebook has obtained licenses,
uncertainty remains regarding the applicability of money transmitter laws to Facebook’s evolving
payments product. See Brittany Darwell, Facebook Obtains Money Transmitter Licenses in 15 States,
INSIDE FACEBOOK (Feb. 22, 2012), http://www.insidefacebook.com/2012/02/22/facebook-obtains-
money-transmitter-licenses-in-15-states (Facebook’s S-1 filing contains the following statement:
“Depending on how our Payments product evolves, we may be subject to a variety of laws and
regulations . . . including those governing money transmission, gift cards and other prepaid access
instruments, electronic funds transfers, anti-money laundering, counter-terrorist financing, gambling,
banking and lending, and import and export restrictions. In some jurisdictions, the application or
interpretation of these laws and regulations is not clear.”).
205. See Think Computer Corp., supra note 20, at 16–17 (discussing its decision to shut down a
mobile payment system in light of threats of incarceration by the Department of Financial Institutions
for operating without a licenses); see also Hurh & Luce, supra note 30 (Regulators warned conference
participants of “both new and established companies that learned the hard way about the broad
applicability of state money transmitter licensing laws.”).
206. See Mariani, supra note 30 (concluding that startups may be dissuaded from innovating in
light of the unsettled legal environment and potential costs of regulation); Thomas, supra note 30
(noting the chilling effect of broad money transmitter laws on innovation).

that bears the risk of the imprecise and ambiguous nature of state money
transmitter laws.
The following examples show how potentially regulated persons can
opt to deal with the uncertain scope of state money transmitter laws. PayPal
long struggled with the question of money transmitter licensing,207 but
ultimately became licensed under state law.208 Other companies such as
Facebook have also opted to become licensed in anticipation of offering
payment products that may evolve in a way so as to fall within the
potentially sweeping scope of money transmitter laws.209 Those that
mistakenly determine that their business model does not constitute money
transmission or who are not aware of the money transmitter regulation can
face significant risk. The case of Think Computer Corporation’s (“Think”)
FaceCash mobile payment system is illustrative. Think operated the system
until it was forced to shut down due to the California Department of
Financial Institution’s threatened enforcement actions and penalties,
including incarceration.210 Think claims that it shut down the business
because of its inability to secure the information necessary to apply for a
license, highlighting a perception that state regulatory discretion in the
license application process results in inconsistent results for applicants.211
Most recently, Square’s payment service was scrutinized by the Illinois
Department of Financial and Professional Regulation, which issued a cease
and desist order alleging violations of the state’s money transmitter law.212
Despite the potentially broad application of money transmitter laws, the
foregoing instances of regulatory enforcement actions at the state level
appear to be isolated events rather than a component part of an attempt to
clearly define the scope of such laws and consistently enforce regulatory
requirements either at the state level or nationally.
As evidenced by the foregoing examples, state money transmitter laws
increase transaction costs by virtue of an unsettled legal and regulatory
207. See Negroni, supra note 203.

208. Paypal State Licenses, PAYPAL, https://www.paypal-media.com/state_licenses.cfm (last
visited Sept. 30, 2013); see also MISS. DEP’T OF BANKING, CONSUMER ACTIVE COMPANIES WITH DATE
LAST EXAMINED—SORTED BY REGION—COMPANY TYPE: MONEY TRANSMITTER (2013), available at
http://www.dbcf.state.ms.us/documents/lists/moneytransmitter.pdf.
209. See Darwell, supra note 204; Sposito, supra note 204.
210. See Think Computer Corp., supra note 20.
211. Id.
212. See Cease and Desist Order, No. 13 CC 208, State of Ill. Dep’t of Fin. and Prof’l Regulation,
Dep’t of Fin. Inst., available at http://www.idfpr.com/dfi/CCD/Discipline/SquarePersonified
CDOrder13CC208.pdf (noting the penalties and fines imposed on Square for violations of the Illinois
money transmitter law); Ken Yeung, Square Served Cease and Desist Order in Illinois for Violating the
Transmitters of Money Act, THE NEXT WEB (Mar. 1, 2013, 7:37 PM)
http://thenextweb.com/insider/2013/03/01/square-receives-cease-and-desist-from-illinois-regulators/
(noting that the Illinois Department of Financial & Professional Regulation recently issued Square a
cease and desist order for violating the state’s money transmitter law).

environment. In addition to the costs and burdens of complying with state-

specific regimes, potentially regulated persons suffer from greatly
increased information and search costs when trying to independently
evaluate the applicability of state laws. This is due to the lack of clear
guidance regarding their scope. Moreover, there are real risks for failing to
“properly” interpret the statutory scope because regulatory enforcement
actions and penalties may follow. In the absence of clear guidance, it is the
potentially regulated that unfairly bear the burdens and risks.
B. Stifling Innovation
While the problems of ambiguity stemming from state money

transmitters affect all persons engaging in activities that fall within the
definition of money transmission, the providers of Internet and mobile
payment services are particularly sensitive to the need for clarity regarding
the scope of regulation. Given the exponential growth of Internet and
mobile payment volume213 and the stream of new payment services that
may fall within the plain language of regulation,214 it is not surprising that
the payments industry, attorneys advising potentially regulated payment
services, and business media have expressed concerns over the potential
impact of an uncertain regulatory environment on continued development
of innovative business models and called for greater clarity on the scope of
state money transmitter laws.215 Those who recognize the failings of state
money transmitter laws to clearly address new payment innovations
question whether the lack of clarity will stifle ongoing innovation.216 The
costs of evaluating whether compliance is necessary, the actual costs of
becoming licensed and otherwise satisfying the regulatory requirements,
and the risks of operating without a license may all act as a deterrent to
those who wish to develop payment innovations. Large companies may
have the resources needed to: (1) investigate and gather information before
making an informed decision on licensing; (2) become licensed and comply
with ongoing regulatory requirements; or (3) simply mitigate risk by
becoming licensed.217 However, start-ups may not have the same resources

216. Id.; see also Thomas P. Brown, Lecturer, Berkeley Law Sch., Univ. of Cal. & Partner, Paul
Hastings LLP, Before the Banking and Finance Committee, California State Assembly (March 11,
2013), available at http://www.law.berkeley.edu/files/bclbe/TPB_Banking__Finance_
Committee_Testimony_(final).pdf?utm_source=March+2013+Update&utm_campaign=February+2013
+Update&utm_medium=email (discussing the California Money Transmitter Act and its effect on
innovation).
217. Mariani, supra note 30; Thomas, supra note 30.

or ability to mitigate risk.218 Accordingly, many may elect to wait until the
regulatory requirements are more settled.219 Therefore, the impact of
uncertainty may disproportionately impact start-ups, acting as a barrier to
entry and stifling new payment innovations.220
These concerns highlight the importance of constantly re-evaluating
money transmitter laws to ensure that: (1) businesses engaging in activities
potentially subject to regulation have clear guidance as to when licensing is
necessary and when it is not; and (2) state regulators consistently apply
regulatory oversight to only those activities, new or old, that implicate the
same type of consumer protection concerns state money transmitter laws
seek to mitigate.
IV. A MODERN APPROACH TO MONEY TRANSMISSION THAT RESPECTS

CONSUMER PROTECTION
This Article suggests that state money transmitter laws must be recast
in light of new technology in order to provide greater clarity on the scope
of regulation. In doing so, the guiding principle should be to uphold the
consumer protection purpose of such statutes by regulating only those
activities that carry the same risk of loss as traditional money transfer
services while leaving other activities unencumbered by the cost and
compliance burden of becoming licensed unnecessarily.221 When analyzing
Internet and mobile payment services through the lens of consumer
protection, it is evident that the extension of state money transmitter laws
may be inappropriate in many instances.222 Internet and mobile payment
services that facilitate a purchase and sale transaction between a buyer and
merchant seller appear to carry no more risk of loss to the consumer than in
any direct purchase transaction between a buyer and merchant seller.223 As
such, the goal of preventing consumer harm in the event of
nonperformance by the money transmitter is not supported by the extension
of regulation.224 Where there are few if any consumer protection gains, the
extension of such laws to Internet and mobile payment services would
result in a one-size-fits-all regulatory scheme that fails to differentiate
between the unique risks of each potentially regulated activity. Such an
approach fails to recognize current marketplace realities, specifically how
commerce is and will continue to be conducted as technology advances and

221. See infra Part IV.A–C.
222. See infra Part IV.A–B.
223. See infra Part IV.A.
224. See infra Part IV.B.

consumer habits change. Therefore, the extension of state money

transmitter laws in the absence of a real consumer protection concern
would needlessly hinder innovation to payments processes and commerce
without materially advancing the statutory goals of such statutes.
A. The Unique Consumer Risks of Payment Innovations
The consumer protection purpose of state money transmitter laws is not

well served by extending regulation because many payment services pose
little real risk of consumer loss. Because Internet and mobile payment
services typically facilitate the purchase of a product or service,225 the
consumer’s payment to the service provider is effectively payment to the
merchant seller. As a result, the consumer is entitled to the purchased item
and often takes possession of the purchased item at that time.226 Therefore,
the failure of the service provider to deliver the money to the merchant will
result in a merchant loss rather than a consumer loss.227 In the event of a
dispute between the consumer and the merchant, additional protections are
available to give aggrieved consumers avenues for redress.228 Specifically,
payment service providers often provide dispute resolution procedures that
supplement the protections that the credit card associations provide to
cardholders where a credit/debit card is used to make the purchase.229 In
short, a consumer who makes a purchase via a third-party payment service
provider is at no greater risk of loss than a consumer who makes a purchase
directly from the merchant.230 Because the consumer protection concerns
are far less pronounced, the statutory purpose of consumer protection is not
served by levying additional regulatory compliance requirements on
payment services, which do not carry the same risk of consumer harm.

226. See infra Part IV.A.1.
227. See Amy Martinez, Amazon Sellers Complain of Tied-Up Payments, Account Shutdowns,
SEATTLE TIMES (Nov. 19, 2012, 11:55 AM), http://seattletimes.com/html/businesstechnology/
2019705292_amazonseller18.html. (describing disputes between merchants and payment service
providers such as Amazon and eBay); Amy Martinez, Small Online Merchants File Suit Against
Amazon.com, SEATTLE TIMES (Mar. 15, 2013, 1:30 PM), http://seattletimes.com/html/
businesstechnology/2020568463_amazonsellersuitxml.html (discussing a class action suit filed by small
merchants against Amazon for withholding payments from sales of merchant products and services via
Amazon’s marketplace). While merchants may be dissatisfied with the payment service provider, it
appears that they are not inclined to pursue any claims against the consumer purchaser. This is
ostensibly a tacit if not explicit acceptance that such claims are unlikely to be successful where the
merchant elects to use a particular payment service provider and directs the customer to make a
purchase using such service. In those instances, common sense would indicate that the customer should
not be liable for what amounts to be a dispute between the merchant and its service provider.
230. See infra Part IV.A.

1. Differentiating Risk
Unlike traditional money transfer businesses that act on behalf of

consumer customers in delivering money, consumers face far less risk
where the money transfer is a component part of a purchase transaction.
With money transfer businesses like Western Union, consumers contracted
directly with the service provider, and the service provider was paid by the
customer to act on behalf of the consumer in ensuring safe delivery of the
customer’s money.231 In such situations, state regulators have a legitimate
interest in protecting consumers from being defrauded and suffering
monetary losses in the event that the money transfer business fails to follow
through on its promise to deliver the consumer’s money.232 If left
unregulated, insufficiently capitalized businesses without the ability to
reliably perform could cause consumer losses. Moreover, those with
nefarious intentions could take money for delivery along with any
associated fees without any intention of actually performing. Where a
service provider does not perform, the consumer will lose the funds trusted
to the service provider and might have little ability to locate the funds or
otherwise seek a remedy. In such circumstances, consumer protection is an
appropriate regulatory concern, and money transmitter laws ably function
to reduce the risk of loss by requiring a license from the state, compliance
with minimum net worth requirements, and delivery of surety bonds.233
Therefore, the imposition of state money transmitter regulations is entirely
appropriate where there is a real risk of consumer losses.
In contrast, where the service provider contracts with a merchant to
accept customer payments and deliver such payments to the merchant,
there is much less consumer risk because the merchant engaging the service
provider bears the risk of nonperformance.234 Instead of contracting with a
consumer to provide delivery services on behalf of the consumer, a
payment service provider enters into a relationship with a merchant seller
and agrees to accept and process customer payments on behalf of the
merchant.235 Here, the payment service provider to merchant relationship is
231. See Negroni, supra note 203 (describing the origins of money transmitters as stemming from
the early 1900s and the desire of immigrants to have a means of sending money to their native
countries).
232. See, e.g., VA. CODE ANN. § 6.2-1902 (formerly cited as § 6.1-371 (2010)) (effective July 1,
2013).
233. See supra Part I.A.3.
235. See, e.g., PayPal User Agreement, PAYPAL, https://cms.paypal.com/us/cgi-
bin/?cmd=_render-content&content_ID=ua/UserAgreement_full&locale.x=en_US (last updated Aug.
20, 2013).

that of agent and principal.236 While the rights and responsibilities between
the service provider and the merchant are set by private agreement,237 the
merchant could be described as engaging the service provider to accept
payments on the merchant’s behalf.238 To the consumer making a purchase,
delivery of payment to the service provider is effectively delivery of
payment to the merchant for purpose of concluding a sale.239 So long as the
consumer receives the purchased item, the consumer will not suffer a loss,
even if the service provider does not transfer the payment to the merchant
in accordance with the terms of their agreement. Accordingly, the risk
profile for a consumer making a purchase through a payment service
designated by the merchant seller is wholly different than the situation
where a consumer pays a money transfer service to take and deliver money
on behalf of the consumer; the failure of delivery in the latter results in a
direct loss to the consumer, whereas the failure of delivery in the former
does not necessarily result in a loss.
Consumer customers who make in-store purchases via a mobile wallet
or mobile card reader face almost no risk of loss because the consumer will
often receive possession of the purchased item at the time of payment.240
When a well-heeled gentleman purchases an Emilio Pucci necktie from
Bloomingdale’s, he simply taps his Google Wallet equipped smartphone to
the terminal at checkout to pay and leaves the store with the necktie in
236. See RESTATEMENT (THIRD) OF AGENCY § 1.01 (2006) (defining agency as “the fiduciary
relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’)
that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent
manifests assent or otherwise consents so to act”).
237. See PAYPAL, supra note 235.
239. For example, customers may make a purchase directly from a merchant website that utilizes
a third party to accept the payment. See, e.g., Checkout by Amazon, AMAZON, supra note 179.
Likewise, customers often make in-store purchases directly from a merchant who may use a third party
to provide payment services such as a mobile wallet or mobile card reader. See, e.g., GOOGLE, supra
note 190; Square Register, SQUARE, https://squareup.com/register#signature (last visited Sept. 16,
2013).
240. Even where a customer does not immediately take possession of the purchased item (i.e.
delivery at a later date), the risk to the customer is no greater than if the customer paid the merchant
directly with the expectation that the purchased item would be subsequently delivered. In both
situations, the customer has made a payment on the expectation of future delivery and bears some risk
of nonperformance by the merchant seller. The only potential for added risk is if the third-party service
provider does not transfer the payment and the merchant withholds delivery as a result. However, in
most cases, the credit card is not charged until the merchant has certified shipping or delivery. See
Checkout by Amazon, AMAZON, supra note 179; see also MasterCard Rules, MASTERCARD app. B-1
(June 14, 2013), http://www.mastercard.com/us/merchant/pdf/BM-Entire_Manual_public.pdf (noting
that merchants generally must not submit transactions until after the products are shipped or services
performed). In addition, most merchants do not pursue claims against consumers for failure of a service
provider selected by the merchant to abide by the terms of their private arrangement. See supra note
227.

hand.241 Similarly, when a caffeine-craving CEO stops into Starbucks for a

triple venti non-fat no foam vanilla latte, she simply orders at the register
and gives her name to pay.242 The GPS technology on the CEO’s mobile
device allows the barista to pull up the customer’s name and picture to
confirm the purchase, allowing the CEO to walk out with latte in hand.243
Thus, the functionality of mobile wallets such as Google Wallet, Square,
Level Up, Isis, and Merchant Customer Exchange allows for the purchaser
to receive the purchased item regardless of whether there is subsequently a
problem with transferring the money from the service provider to the
merchant seller.
The same is true of mobile card readers like Square Register and
PayPal Here. If a customer wishes to purchase a shrimp po’boy from a food
truck utilizing PayPal Here, the merchant simply swipes the customer’s
card through a card reader plugged into the phone’s audio jack.244 The
customer then signs on the screen of the smartphone to complete the
purchase and can walk away happily with a meal.245 As evidenced by the
foregoing, the failure of a service provider to perform the money
transmission services or any other contractual obligations agreed upon
between the service provider and the merchant is unlikely to result in an
adverse impact on the consumer. In such situations, there is little risk of
loss because the consumer receives the purchased item at the time of
payment and does not expect anything further. Instead, the risk of loss in
the event of non-performance lands squarely on the shoulders of the
merchant who engages the service provider.246
Where a consumer makes a payment via a third-party Internet or
mobile payment service, there appears to be no greater risk of loss to the
consumer than if the consumer were to pay the merchant directly. As might
be expected, there is an implicit (if not explicit) recognition that the buyer
is entitled to the purchased item upon delivery of the payment to the service
241. See GOOGLE, supra note 190 (discussing the payment process and identifying
Bloomingdale’s as a participating merchant).
242. See SQUARE, supra note 187 (discussing the payment and checkout process for a hands-free
transaction).
243. Id.
244. See PAYPAL, supra note 194 (noting that a merchant can also manually enter the card
number or use the smartphone’s camera function to scan the card).
245. Id.
246. See supra note 227. An allocation of risk that results in the merchant bearing the risk of loss
is appropriate because it is the merchant (not the consumer) who elects to engage a payment service
provider and has the opportunity to evaluate the ability of the service provider to perform. The merchant
will also have the opportunity to contract for and pursue any private rights and remedies in accordance
with the terms and conditions of the agreement between the merchant and the seller. Thus, the merchant
is not wholly without recourse. Moreover, the consumer protection concerns of state money transmitter
laws do not support an extension of protections to merchants.

provider.247 Merchants who sell on online marketplaces like the Amazon

Marketplace must often confirm shipment of the purchased item before the
consumer’s credit/debit card is charged by the payment service provider
and funds delivered to the merchant.248 In addition, where the purchased
item is an electronic good like an app, the consumer typically obtains the
ability to commence downloading the app immediately after payment.249
Therefore, in many cases, the consumer may receive the purchased item at
the time of purchase or immediately thereafter, or at least be assured of the
purchased item being shipped prior to being charged.
Even if the consumer were charged before receiving the purchased
item, there would be no added risk when compared to a purchase directly
from the merchant. If a consumer were to make a purchase over the
Internet directly from a merchant who does not utilize a third-party
payment service, the merchant would have received payment on the
promise of subsequent delivery. The potential for non-delivery or delivery
of a non-conforming item would still exist. With a third-party Internet or
mobile payment service, the situation is no different. The consumer will
have delivered payment to the service provider as directed by the merchant
seller on the promise that the merchant will subsequently deliver the
purchased item, leaving the consumer open to the same risk of non-delivery
or nonconforming delivery. Therefore, the involvement of a third-party
payment service provider does not appear to materially increase the
likelihood that a consumer will suffer a loss in the event of the service
provider’s failure to deliver the payment to the merchant.
2. An Added Layer of Consumer Protection
As noted above, consumers making a payment through an Internet or

mobile payment service typically receive the benefit of their bargain (i.e.,
the purchased item) even when the service provider fails to perform (i.e.,
delivery of payment to the merchant).250 As such, there is less consumer
protection concern than in a traditional money transfer business where the
failure of the money transmitter to perform would result in the loss of the
funds provided by the consumer. Internet and mobile payment services also
mitigate the potential risk of loss with an added layer of consumer

248. See Checkout by Amazon, AMAZON, supra note 179. While there is no law that prohibits a
business from submitting a credit card transaction before delivering the purchase product or performing
the purchased services, such a business practice is consistent with credit card rules and regulations that
generally mandate delivery before submission. See MasterCard Rules, supra note 240, at app. B-1.
249. See Taatjes, supra note 173 (discussing the downloading of apps); Visibility for Your Apps,
ANDROID, http://developer.android.com/distribute/googleplay/about/visibility.html (last visited Feb. 16,
2013) (discussing downloads of Android apps on the Google Play app store).
250. See supra Part IV.A.1.

protection. Where the consumer does not receive the purchased item or is
dissatisfied with the delivered item (e.g., it is not as described or arrives
damaged), the service provider may also provide a dispute resolution
procedure and allow the consumer to recoup the purchase price.251 Such
dispute resolution procedures supplement the protections afforded to those
who make purchases with a credit card or debit card, which may give
cardholders the ability to dispute or otherwise challenge charges.252
Therefore, consumers often have an additional avenue for redress that is
not available in a direct purchase and sale transaction with a merchant
seller, which further mitigates the risk of consumer loss.
251. See, e.g., A-to-Z Guarantee Process, AMAZON,

https://payments.amazon.com/sdui/sdui/helpTab/Amazon-Flexible-Payments-Service/Resolving-
Disputes/-A-to-z-Guarantee-Process (last visited Sept. 16, 2013) (describing Amazon’s A-to-Z
Guarantee); Buyer Dispute Program, AMAZON, https://payments.amazon.com/sdui/
sdui/about?nodeId=6025 (last visited Sept. 16, 2013) (describing buyer protections available from
Amazon); Transaction Disputes, AMAZON, https://payments.amazon.com/sdui/sdui/about?nodeId=5968
(last visited Sept. 16, 2013) (describing the Amazon transaction dispute process); Chargeback Process,
GOOGLE, http://support.google.com/checkout/sell/bin/answer.py?hl=en&answer=134372 (last visited
Sept. 16, 2013) (describing how purchase amounts can be charged back to the merchant); Mediation,
GOOGLE, http://support.google.com/checkout/sell/bin/answer.py?hl=en&answer=134373 (last visited
Sept. 16, 2013) (describing situations where Google will mediate disputes); Security, PAYPAL,
https://www.paypal.com/webapps/mpp/paypal-safety-and-security (last visited Sept. 30, 2013)
(describing PayPal’s purchase protection program); Security and Protection, PAYPAL,
https://www.paypal.com/us/webapps/mpp/security/seller-dispute-resolution (last visited Sept. 16, 2013)
(providing guidance regarding the dispute resolution procedure for sellers); Square Seller Agreement,
SQUARE, https://squareup.com/legal/merchant-ua (last updated June 25, 2013) (describing the
merchant’s liability for chargebacks for unauthorized or challenged transactions); see also Casey Chan,
How to Get a Refund from the App Store, GIZMODO (Feb. 20, 2012, 5:40 PM),
http://gizmodo.com/5886683/how-to-get-a-refund-from-the-app-store (describing how to pursue a
refund from the Apple App Store notwithstanding terms providing for all sales to be final).
252. Credit card transactions benefit from greater protections under Regulation Z than are
available for debit card transactions under Regulation E. See Truth in Lending (Regulation Z), 12
C.F.R. §§ 226.12(c)(1), 226.13(d)(1) (2012) (giving credit cardholders the right to: (1) assert against the
card issuer “all claims (other than tort claims) and defenses arising out of the transaction and relating to
the failure to resolve the dispute” with the merchant; and (2) withhold “any portion of any required
payment that the consumer believes is related to the disputed amount”); see also 15 U.S.C. § 1693g
(2006) (only limiting liability to debit card holders for unauthorized transactions); Ichiro Kobayashi,
Private Contracting and Business Models of Electronic Commerce, 13 U. MIAMI BUS. L. REV. 161,
192–95 (2005) (describing protections for credit cardholders); Daniel M. Mroz, Credit or Debit?
Unauthorized Use and Consumer Liability Under Federal Consumer Protection Legislation, 19 N. ILL.
U. L. REV. 589, 603–08 (1999) (recognizing that debit cardholders benefit from less consumer
protection than holders of credit cards); Neil M. Peretz, The Single Euro Payment Area: A New
Opportunity for Consumer Alternative Dispute Resolution in the European Union, 16 MICH. ST. J.
INT’L L. 573, 598–99 (2008) (noting that credit cardholders may have remedies even if the purchase
was authorized); David E. Sorkin, Payment Methods for Consumer to Consumer Online Transactions,
35 AKRON L. REV. 1, 8 (2001) (“Paying by credit card affords much greater protection to a buyer than
do other traditional payment mechanisms largely because of the credit card dispute rights provided by
Federal Reserve Regulation Z.”); Jane K. Winn, Making XML Pay: Revising Existing Electronic
Payments Law to Accommodate Innovation, 53 SMU L. REV. 1477, 1491–92 (2000) (noting that Reg. Z
“provides a simple and effective alternative dispute resolution process in the event the consumer is
unhappy with the transaction”).

PayPal,253 Amazon,254 and Google255 all have dispute resolution

procedures that facilitate the resolution of problems between sellers and
buyers who utilize such services to send and receive payments. When a
customer is dissatisfied with the purchase, he or she has the right to initiate
a process whereby the service provider will investigate and refund the
money if the customer prevails.256 Therefore, where a seller fails to deliver
a purchased item or delivers an unsatisfactory item, the consumer may have
a remedy.
In addition, an aggrieved consumer who pays using a credit card or
debit card has the benefit of protection under federal law257 and credit card
association operating rules.258 Under Regulation Z, consumers have the
right to assert claims against a credit card issuer with respect to certain
disputes between the seller and a buyer in a consumer goods transaction.259
Accordingly, if a consumer credit cardholder has a dispute with a merchant
regarding the purchase of a consumer good, he or she can assert his or her
claim against the bank that issued the credit card. Such a remedy would
appear to apply regardless of whether the payment was made through a
service provider or directly from a merchant. Because the protections for
debit card transactions under Regulation E are much more limited, a
consumer using a debit card to make a payment through an Internet or
mobile payment service may have greater liability if a dispute arises.260
However, the distinctly different treatment of credit/debit cards would
appear to impact a cardholder similarly regardless of whether the payment
253. See PayPal User Agreement, PAYPAL, supra note 235, § 13 (setting forth Protections for
Buyers); see also Buyer Complaint Process, PAYPAL, https://www.paypal.com/cgi-
bin/webscr?cmd=p/gen/buyer-complaint-outside (last visited Oct. 1, 2013); Paypal Security and
Protection, PAYPAL, supra note 251.
254. See Amazon Payments User Agreement, AMAZON § 3.5,
https://payments.amazon.com/sdui/sdui/helpTab/Personal-Accounts/User-Agreement-Policies/User-
Agreement (last updated July 10, 2013); see also Buyer Dispute Program, AMAZON, supra note 251.
255. See Mediation, GOOGLE, supra note 251.
258. See VISA, VISA INTERNATIONAL OPERATING REGULATIONS 832–47 (Apr. 15, 2013),
http://usa.visa.com/download/merchants/visa-international-operating-regulations-main.pdf (discussing
the resolution of cardholder disputes); see also Sorkin, supra note 252, at 8–9 (noting that the credit
card issuer can chargeback a transaction even if it does not qualify under Regulation Z).
259. Truth in Lending (Regulation Z), 12 C.F.R. §§ 226.12(c)(1), 226.13(d)(1) (2012); see also
Jane Kaufman Winn, Open Systems, Free Markets, and Regulation of Internet Commerce, 72 TUL. L.
REV. 1177, 1236 (1998).
260. Under the Electronic Funds Transfer Act, the consumer has limited liability for unauthorized
transactions under Regulation E. See 15 U.S.C. § 1693g (2006). However, the definition of
“unauthorized transaction” does not include authorized transactions where merchandise is not delivered
or is nonconforming. See 15 U.S.C. § 1693a(12). As such, the protections available for debit cards
under the EFTA are not as strong as those available for credit cards under Regulation Z. Specifically,
the right to assert claims relating to a dispute with the merchant against the card issuer is much more
expansive than limited protections for unauthorized transactions. See Sorkin, supra note 252, at 7–9.

was made directly to the merchant or if the payment was made through an
Internet or mobile payment service provider.
Notwithstanding the limited remedies of Regulation Z,261 consumers
may have better luck disputing or challenging a charge directly with the
credit card issuer.262 Upon receipt of the complaint, the credit card issuer
will temporarily credit the cardholder’s account for the amount of the
disputed transaction pending the results of an investigation.263 If the dispute
is resolved in favor of the cardholder, the credit remains and the amount is
“charged back” to the merchant.264 Merchants that wish to accept
credit/debit cards must enter into an agreement with the credit card
association (e.g., Visa or MasterCard) and agree to abide by the terms and
conditions of their operating rules.265 Included in the terms and conditions
are a number of broad chargeback rights. For example, amounts may be
charged back to the merchant if: (1) the merchant fails to perform the
service or deliver the merchandise; (2) the merchant delivers defective or
damaged merchandise; or (3) the merchant delivers merchandise that is not
as described on the transaction receipt or is otherwise unsuitable for the
purpose sold.266
As illustrated above, a consumer that uses a credit card or debit card to
make a purchase via an Internet or mobile payment service at worst
benefits from the same protections that are available to all credit/debit card
transactions.267 However, certain payment service providers may provide
for added consumer protections in the form of buyer protection efforts to
supplement those generally available for credit/debit card transactions.268
As such, it appears that in many cases there is no greater risk of consumer
loss to justify or otherwise support the extension of money transmitter
regulation.
261. 12 C.F.R. §§ 226.12(c)(1), 226.13(d)(1).

262. See Mroz, supra note 252 (describing the chargeback process); Sorkin, supra note 252, at 8–
9; see also Chargebacks & Dispute Resolution, VISA, http://usa.visa.com/merchants/operations
/chargebacks_dispute_resolution/index.html (last visited Sept. 27, 2013) (discussing the chargeback
process generally and noting that a chargeback to the merchant is often triggered by a customer
dispute); VISA, CHARGEBACK MANAGEMENT GUIDELINES FOR VISA MERCHANTS 29 (2011),
http://usa.visa.com/download/merchants/chargeback-management-guidelines-for-visa-merchants.pdf
(discussing customer dispute chargebacks).
263. See VISA, CHARGEBACK MANAGEMENT GUIDELINES FOR VISA MERCHANTS, supra note
262, at 29.
264. Id. at 32.
265. See VISA, supra note 252, at 397 (mandating a merchant agreement).
266. Id. at 831–34 (describing available chargeback rights).

B. Statutory Purpose Does Not Support Indiscriminate Extension
In the absence of additional consumer risk, the main purpose of money

transmitter laws—to protect consumers—is not served by indiscriminately
extending regulation to all third-party Internet and mobile payment service
providers who accept and transfer payments on behalf of merchants. This
Article suggests that a more nuanced approach would better serve the
statutory purpose of state money transmitter laws by only extending
regulation to those activities that implicate meaningful consumer protection
concerns of the sort raised by traditional money transfer business. Instead
of taking the one-size-fits-all approach of extending regulation to all
activities that fall within the sweeping definition of money transmission,
state money transmitter laws should be recast so as to support the statutory
goal of consumer protection where appropriate and to clearly exclude other
activities from regulation.
As noted above, many payment services do not materially increase the
risk of loss to the consumer.269 While the use of such services does not
come wholly without risk, many consumers making payments via an
Internet or mobile payment system face a risk profile that is almost
indistinguishable from any other purchase and sale transaction effectuated
directly between a buyer and seller without the involvement of a third-party
payment service.270 Where a payment service does not increase the risk of
consumer loss, 271 the extension of regulation would not serve the purpose
of state money transmitter laws.272 As such, the regulation of such services
would be inappropriate and wholly unsupported by statutory purpose.
It is important, however, to clarify that all payment services should not
be wholly excluded from the ambit of money transmitter regulation. Under
the approach advocated by this Article, the consumer protection purpose of
state money transmitter laws should guide the scope of regulation. To the
extent that new or emerging payment systems raise increased risks of
consumer loss, regulation under the money transmitter law regime would
be fitting. For example, Western Union’s use of new technology to
effectuate a money transfer on behalf of a consumer customer should
continue to be regulated as a money transmission. Perhaps more
illuminating is the case of PayPal. As noted above, PayPal provides a
number of payment services, such as the mobile card reader PayPal Here
and a checkout service for merchants, which do not appear to raise
269. See supra Part IV.A.


consumer protection concerns.273 However, PayPal also offers a consumer-

facing product that allows individual consumers to send money to their
friends, family, and others.274 Such a service appears to operate as the
functional equivalent of a traditional money transfer business and carries
with it the same potential for consumer harm. As such, under the approach
advanced by this Article, PayPal would need to obtain a license and comply
with state money transmitter laws. The distinction, however, is the basis for
regulation. PayPal would not be subject to regulation because its varied
payment service offerings to merchants can be construed as money
transmission. Instead, PayPal would be deemed a money transmitter as a
result of the money transfer service it provides to consumers.
In short, the statutory purpose of consumer protection does not compel
the indiscriminate application of state money transmitter laws to all Internet
and mobile payment service providers. A nuanced approach that focuses on
the consumer protection goals of the statute would better serve the purpose
of state money transmitter laws by mandating oversight when justified by
consumer protection concerns and exempting other activities from needless
regulatory burdens.
C. What About Merchant Protections?
To the extent that payment services are provided to merchants, they

appear to offer a distinctly different risk profile than services provided to
consumers.275 In such situations, the risk of loss shifts in large part from the
consumer to the merchant seller.276 While state consumer protection laws
seek to provide protections for individual buyers of goods and services, it is
less clear that such statutes should offer similar protections for merchants
who sell goods and services.277 The question of what protections (if any)
should be available to merchants using Internet and mobile payment
services is beyond the scope of this Article. However, it is clear that forcing
merchant sellers to bear the entire risk of loss in the event of
nonperformance of a payment service provider may be unappealing.
On the one hand, merchant sellers can be viewed as distinctly different
than individual consumers. By acting in a commercial capacity to sell
goods or services, merchant sellers could be reasonably expected to
exercise care in selecting those who will provide payment services on their
behalf. As such, merchant sellers should bear the risk of nonperformance,
273. See supra Part III.

274. See Transfer Overview, PAYPAL, https://www.paypal.com/webapps/mpp/transfer-money-
online (last visited Sept. 16, 2013).
275. See supra Part IV.A–B.
276. See supra Part IV.A–B.

and are in the best position to conduct due diligence on the qualifications of
the service provider and negotiate any necessary protections to guard
against the risk of nonperformance.278
Unfortunately, not all merchant sellers possess the same level of
sophistication or bargaining power. As a result small business owners such
as the sole proprietor of a food cart may in fact be viewed as more closely
analogous to a consumer. If so, providing merchant protections via statute
may be both necessary and appropriate in certain limited circumstances. In
the absence of such additional protections, smaller merchant sellers may be
particularly susceptible to significant losses (e.g., delivery of goods or
services without payment) in the event of that a payment service provider
does not perform. As compared to consumers, merchant sellers more
appropriately bear the risk of loss.279 Nonetheless, additional statutory
protections may be warranted if simply allowing merchant sellers to sue
nonperforming payment service providers to enforce contractual rights and
remedies is viewed as insufficient.280
D. Indiscriminate Extension Needlessly Hinders Innovation and

Ignores Marketplace Realities
Because the indiscriminate extension of state money transmitter laws to

all Internet and mobile payment mechanisms is not supported by statutory
purpose, doing so would: (1) needlessly hinder continued innovation and
competition in the payments industry; and (2) wholly fail to accommodate
a societal shift toward conducting commerce over the Internet and mobile
platforms and using non-paper-based payment mechanisms. Instead the
nuanced approach advanced by this Article clarifies the scope of regulation
while appropriately recasting state money transmitter laws to accommodate
technological advances and the development of innovative business
models. Guidance and support for such an approach abounds. The need to
ascertain the scope and applicability of existing laws and regulations in
light of new and emerging technologies is nothing new.281 In the context of
money transmitter regulation at the federal level, regulators have already
recognized the need to accommodate previous payment system

280. See Martinez, supra note 227 (discussing merchant law suits against nonperforming
payment service providers).
281. See, e.g., Am. Libraries Ass’n v. Pataki, 969 F. Supp. 160, 161–82 (S.D.N.Y. 1997) (noting
that (1) judges and legislators are “faced with adapting existing legal standards to the novel
environment of cyberspace,” (2) the “Internet . . . requires a cohesive national scheme of regulation so
that users are reasonably able to determine their obligations,” and (3) the “[r]egulation on a local
[l]evel . . . will leave users lost in a welter of inconsistent laws, imposed by different states with
different priorities”).

innovations.282 Moreover, financial laws, including in the heavily regulated

banking industry, have historically been appropriately reinterpreted in light
of technological changes.283 The foregoing supports the proposition that
state money transmitter laws can and should be appropriately recast in light
of new ways of conducting commerce.
1. Lessons from the Federal Reserve Board
In 2005, the Federal Reserve Board addressed the lack of clear and
consistent state and federal regulation of prepaid products such as gift
cards, including concerns over the applicability of state money transmitter
laws.284 At the time, industry participants felt that “uncertain legal and
regulatory conditions [could] stifle innovation in the industry, as
compliance with an increasing number of laws and regulations, particularly
at the state level, [could] make products too expensive to offer.”285 Industry
participants also noted that existing regulations failed to adequately
differentiate between types of prepaid products, which may have very
different risk characteristics for the general public.286 In responding to these
concerns, the Federal Reserve Board concluded that: (1) significant
changes were taking place in payment systems; (2) payment systems varied
widely and a one-size-fits-all regulatory approach may not best fit the
needs of the industry or best address the risks associated with prepaid
products; and (3) regulation should not unduly hinder innovation.287
Just eight years later in 2013, the discussion of Internet and mobile
payment systems is like déjà vu. The payments industry is rightfully
expressing concern regarding the lack of clear and consistent guidance as to
regulation of Internet and mobile payment systems.288 Moreover, the speed
of innovation has resulted in different business models with unique risk
profiles.289 Nonetheless, existing regulation fails to adequately differentiate
Internet and mobile payment services for purposes of regulation.290 Like the
providers of prepaid products, the proponents of new and emerging
payment systems rightfully fear that the lack of clarity and the costs of
282. See FEDERAL RESERVE, supra note 1; see also Financial Crimes Enforcement Network;
Amendment to the Bank Secrecy Act Regulations—Definitions and Other Regulations Relating to
Money Services Businesses, 74 Fed. Reg. 22,129-01 (proposed May 12, 2009) (to be codified at 31
C.F.R. pt. 103).
283. See supra Part IV.D.2.
284. See FEDERAL RESERVE, supra note 1.
285. Id.
286. Id.
287. Id.
289. See supra Parts II–IV.
290. See supra Part IV.

compliance will have a chilling effect on innovation.291 Given the

similarities, the Federal Reserve Board’s 2005 conclusions may very well
be an inspired utterance as to the appropriate means for reconciling the
tension between potentially sweeping regulation and innovative business
models. Transposing the Federal Reserve Board’s conclusions to the
present situation mandates the recognition of ongoing transformational
change with respect to payment systems. As noted by the Federal Reserve
Board, a one-size-fits-all regulatory scheme may not fit the needs of the
industry or address the risks of new and emerging payment systems.
Because the Internet and mobile payment services vary widely in
functionality and potential risk to the general public, such an approach
would be inappropriate, and would unnecessarily hinder payment
innovation. In contrast, the Federal Reserve Board’s conclusions support
the adoption of the more nuanced approach advanced by this Article. Such
an approach is flexible enough to differentiate between payment
innovations and address the actual consumer risk that results from each
unique payment service. Instead of needlessly hindering the growing e-
commerce and mobile payment practices of the modern marketplace, this
approach supports continued innovation by eliminating the costs of
regulatory compliance where consumer protection is not served and by
providing greater clarity as to the potential scope of regulation. As such,
the Federal Reserve Board’s conclusions regarding prepaid products
accentuates the need for recasting state money transmitter laws in light of
the real risks of each new payment innovation instead of indiscriminately
extending regulation to any new innovation that falls within the plain
language of the statutes.
2. Lessons from Banking and Financial Regulation
Examples of situations where regulatory requirements have been

reinterpreted in light of technological advances abound. The banking
industry, in particular, has constantly addressed the regulatory implications
of new ways of conducting the very old business of banking.292 As

292. See, e.g., Indep. Ins. Agents of Am. v. Ludwig, Inc., 997 F.2d 958 (D.C. Cir. 1993)
(declining to recast a statute permitting banks located in towns having a population of 5,000 or less to
sell insurance as limiting such sales to local townspeople where new technologies such as telephones
and direct mailing allow for nationwide business and solicitation not contemplated by legislators in
1916); Office of the Comptroller of the Currency, Interpretive Letter No. 875 (Oct. 31, 1999) (setting
forth the regulatory agency’s opinion that 12 U.S.C. § 24 (2006) authorizes banks to engage in certain
new Internet-related services on the basis that such activities are new ways for performing traditional
bank functions or are incidental thereto); RICHARD SCOTT CARNELL ET AL., THE LAW OF BANKING AND
FINANCIAL INSTITUTIONS 198 (4th ed. 2009) (noting that Internet banking holds the potential to
eviscerate any remaining limitations on geographic expansion by a bank).

discussed below, the resolution of regulatory uncertainty can be prompted

by marketplace demand. In addition, the determination of how to
appropriately recast existing laws and regulations can be made on a case-
by-case evaluation that takes into account the marketplace demands of both
industry participants and the public.
The advent of the automated teller machines (ATMs) is illustrative.
Historically, banking laws restricted geographic expansion and branching
by banks.293 In many states, unit banking—a requirement that state-
chartered banks have only one place of doing business—was the norm.294
Under federal law, a nationally chartered bank could only have branches in
its home state and to the extent that state-chartered banks were permitted to
branch under state laws.295 The ATM created a great deal of uncertainty
because it was unclear whether an ATM constituted a bank branch.
Nonetheless, ATMs were broadly supported by both the banking industry
and consumers on the grounds of increased convenience for the public. In
the 1970s and 1980s, many state legislatures acted to liberalize branching
restrictions in response to both public and industry demands.296 At the
national level, the question of whether an ATM constituted a branch
remained unsettled until the National Bank Act was amended to
specifically exclude ATMs from the definition of the term “branch” under
12 U.S.C. § 36(j) (2006).297 Thus, the spread of both intrastate and
interstate banking was, in part, the result of a changing marketplace that
pushed for the liberalizing of branching rules to allow the operation of
ATMs.298 The case of the ATM illustrates the need to recognize
marketplace realities when recasting and clarifying the appropriate scope of
existing regulation.
Like the banking industry, the means of conducting commerce and
making payments are prone to being impacted by technological change.
When recasting money transmitter regulation, care should be taken to
293. See Mehrsa Baradaran, Reconsidering the Separation of Banking and Commerce, 80 GEO.
WASH. L. REV. 385, 399–400 (2012) (describing the removal of legal barriers to geographic expansion);
Sharon E. Foster, Fire Sale: The Situational Ethics of Antitrust Law in an Economic Crisis, 78 MISS.
L.J. 777, 784, 786 (discussion geographic restrictions); Roberta S. Karmel, Is the Public Utility Holding
Company Act a Model for Breaking Up the Banks that are Too-Big-to-Fail?, 62 HASTINGS L.J. 821,
831 (2011) (noting that geographic restrictions prevented concentration in banking); Frederick Tung,
Pay for Banker Performance: Structuring Executive Compensation for Risk Regulation, 105 NW. U. L.
REV. 1205, 1219 (2011).
294. See Kevin J. Stiroh & Philip E. Strahan, Competitive Dynamics of Deregulation: Evidence
from U.S. Banking, 35 J. MONEY, CREDIT & BANKING 801, 806 (2003); see also First Nat’l Bank in
Plant City, Fla. v. Dickinson, 396 U.S. 122 (1969) (discussing Florida’s unit banking statute, which
only allowed banks to have one place of doing business).
295. See 12 U.S.C. § 36(c) (2006).
296. See CARNELL ET AL., supra note 292, at 25.
297. Id. at 190–91.
298. Id. at 25.

accommodate the growing role of Internet and mobile payment services as

a preferred alternative to other payment mechanisms. As with the adoption
of ATMs, the growing acceptance of such payment services in an
ambiguous legal and regulatory environment highlights the importance of
providing clarity regarding the scope of regulation. The nuanced approach
of recasting state money transmitter laws seeks to ensure that Internet and
mobile payment systems are evaluated with a critical eye and a
determination made as to whether the purpose of state money transmitter
laws is served by regulation. Instead of blindly extending regulation or
simply bowing to marketplace demands, this Article seeks to determine the
appropriate scope of such regulation in light of the unique nuances of each
service and any benefits to the marketplace. Basing the determination of
regulation on the extent of consumer protection concerns implicated by
each unique payment service accomplishes this goal. Where the extension
of regulation is not supported by consumer protection concerns, regulation
would needlessly burden commerce by forcing ill-suited regulatory
requirements upon innovative payment services that make purchase and
sale transactions more convenient for consumers and merchants. In
addition, it would needlessly raise the costs of providing such payment
services and potentially reduce the incentive for continued innovations.
However, if consumer protection concerns are implicated, the statutory
purpose of state money transmitter laws is appropriately upheld by
extending regulation. In doing so, state money transmitter laws are
modernized to account for marketplace realities while simultaneously
staying committed to the consumer protection goals of money transmitter
regulation.
V. THE FRAMEWORK FOR A MODEST PROPOSAL
Because law and regulation often lag behind innovative business

models, the need to consistently re-evaluate and adapt existing regulatory
schemes is nothing new.299 Given the rise of Internet and mobile payment
systems,300 it is high time that state regulators and legislators look critically
at state money transmitter laws and unambiguously address the extent to
which such laws apply to new methods of transferring money and making
payments over the Internet and mobile networks.301 This Article has
299. See FEDERAL RESERVE, supra note 1; see also Financial Crimes Enforcement Network;
Amendment to the Bank Secrecy Act Regulations—Definitions and Other Regulations Relating to
Money Services Businesses, 74 Fed. Reg. 22,129-01 (proposed May 12, 2009) (to be codified at 31
C.F.R. pt. 103).
300. See Richard, supra note 1, at 262 (“In five to ten years, the remittance industry will change
greatly because of increases in the variation of service providers and transfer business models.”).
301. See UNIFORM MONEY SERV. ACT, prefatory note, 7A U.L.A. 163–64 (2006).

advocated for state money transmitter laws to be modernized to account for

technological changes while respecting the consumer protection purpose of
such statutes.302 Given the distinctly different risks between money transfer
services provided to consumer customers and payment services provided to
merchant sellers, an appropriate line of demarcation could be made by
extending regulation to the former (and any new ways of conducting the
former) while exempting the latter from regulation in the absence of an
equivalent consumer protection rationale. To do so, this Article advances a
framework for a narrowly tailored statutory exemption that builds on the
“agent of a payee” exemption available under Nevada,303 New York,304 and
Ohio305 law that would supplement other more specific exemptions that
states may enact to clarify the scope of regulation to technological
advances such as stored value or payment processing. The adoption of such
an exemption would provide added certainty for the payment industry
while simultaneously upholding the consumer protection goals of state
money transmitter laws and addressing the unique characteristics of
Internet and mobile payment services.
A. The Agent of a Payee Exemption
Each of Nevada,306 New York,307 and Ohio308 have money transmitter

laws that contain express statutory language that could be construed as
precluding regulation of payment service providers who take and deliver
customer payments on behalf of a merchant seller where certain conditions
are satisfied.309 These states provide for a so-called “agent of a payee”
exemption. In these states: (1) no person may engage in the business of
money transmission without a license; and (2) no person may engage in the
business of money transmission as an agent “except as an agent of a

303. NEV. REV. STAT. § 671.020 (2011).
304. N.Y. BANKING LAW § 641(1) (McKinney 1939).
305. OHIO REV. CODE ANN. § 1315.01(G) (West 2013).
306. See NEV. REV. STAT. § 671.020 (appearing to exclude agents of a payee).
307. See N.Y. BANKING LAW § 641(1) (appearing to exclude agents of a payee).
308. OHIO REV. CODE ANN. § 1315.01(G) (defining the term “transmit money” as not including
transactions in which the recipient of the money or its equivalent is the authorized representative of a
principal in a transaction for which the money or its equivalent is received, other than transactions for
the transmission of money or its equivalent).
309. Unlike the Nevada, New York, and Ohio statutes, the Texas money transmitter law does not
contain express statutory language that exempts agents of a payee from regulation. However, the Texas
Department of Banking is of the opinion that payment processors who act as agents of a merchant by
temporarily holding merchant funds at the end of the settlement process are exempt from licensing
under the money transmitter law. See Tex. Dep’t of Banking, Op. No. 06-01 (May 15, 2006), available
at policy.ctspublish.com/txdob/; see also Tex. Dep’t of Banking, Op. No. 03-01 (June 4, 2003),
available at policy.ctspublish.com/txdob/.

licensee or as agent of a payee.”310 The foregoing requirements are

somewhat unclear. However, the language regarding money transmission
as an agent appears to expressly allow “agents of a payee” to engage in
money transmission without a license and without otherwise being subject
to the regulatory requirements of the state’s money transmitter statute.311
The New York statute and associated regulations provide additional
detail regarding the application of this exemption. Under New York law,
agents of a payee include “any person authorized by a payee to receive
funds on behalf of the payee and to deliver such funds received from the
payor to the payee.”312 The key to qualifying for the exemption is the
presence of a contractual agency relationship between the service provider
and the merchant seller. According to the New York Banking Department,
factors that indicate a valid agency relationship include: (1) a contract
between the agent and the payee; (2) authorization for the agent to receive
payments on behalf of the payee and deliver such payments to the payee;
(3) a receipt from the agent to the customer indicating that payment to the
agent constitutes payment to the payee; (4) the absence of risk of loss to the
customer if the agent fails to remit the payment to the payee; and (5) the
payee treats customers as if the payee received the payment whether or not
the agent actually delivers the funds to the payee.313 The New York
Banking Department has also emphasized that the exemption only applies
where delivery of funds to the agent results in no greater risk to the
customer than if payment were delivered directly to the payee.314
While the “agent of a payee” language is not listed in the statutory
exemptions section of the New York and Nevada statutes, it appears to
function as such, and could be available to Internet and mobile payment
service providers where the service is: (1) provided to a merchant pursuant
to a valid agency agreement and (2) steps are taken to ensure that the buyer
faces no greater risk of loss in delivering a payment to the service provider
instead of paying the merchant directly.
310. See NEV. REV. STAT. § 671.020 (emphasis added); N.Y. BANKING LAW § 641(1); see also
OHIO REV. CODE ANN. § 1315.01(G).
311. See N.Y. Banking Dep’t, Interpretive Letter (Jul. 9, 2007), available at
http://www.dfs.ny.gov/legal/interpret_opinion/banking/lo070709b.htm.
312. N.Y. COMP. CODES R. & REGS. tit. 3, § 406.2(1) (2013).
313. N.Y. Banking Dep’t, Interpretive Letter (April 24, 2007), available at
http://www.dfs.ny.gov/legal/interpret_opinion/banking/lo070424.htm; see also N.Y. BANKING LAW
§ 640(10) (McKinney 1939) (defining the term agent as requiring a written agency contract, albeit in
the context of agents of a licensee as opposed to agents of a payee).
314. N.Y. Banking Dep’t, Interpretive Op., supra note 299 (determining that agent of a payee
exemption was inapplicable where a company that received student payments for prepaid meals at a
secondary school did not give a receipt indicating that payment to the agent was deemed payment to the
payee, and emphasizing that there “ought to be no greater risks than if the funds were delivered directly
to the payee”).

B. The Federal Approach
In addition to the minority of states that have adopted an agent of a

payee exemption, federal laws regulating money transmission have been
quick to adapt to payment innovations. In 2009, amendments clarifying the
application of the BSA’s money transmitter regulations to payment services
were initiated.315 The term “money transmitter” was amended to
specifically exclude any person that “[a]cts as a payment processor to
facilitate the purchase of, or payment of a bill for, a good or service
through a clearance and settlement system by agreement with the creditor
or seller” from the definition of money transmitter.316 This exclusion is
most likely applicable to third-party payment services offered to merchant
sellers. However, it only applies to payment processors, which may be
narrower than the New York and Nevada approach of exempting any agent
of a payee. It is unclear whether all Internet and mobile payment services
provided to a merchant would be deemed payment processors. In addition,
the term “money transmitter” was amended to exclude any person that
“[a]ccepts and transmits funds only integral to the sale of goods or the
provision of services, other than money transmission services, by the
person who is accepting and transmitting the funds.”317 This second
exclusion appears to be focused on sellers themselves who may directly
engage in money transmission when selling their own goods or services. As
such, it is unlikely to be of benefit to third-party payment services not
acting as sellers themselves.
When compared to the agent of a payee approach, the federal
amendments provide more certainty in clearly excluding certain activities
from the definition of money transmission and thus, the scope of
regulation. However, because the federal approach opts to exclude very
narrowly defined payment activities, any business model that does not
clearly fit the description may be resigned to the same unsettled legal and
regulatory landscape.
C. A Mash-Up of the State and Federal Approaches
This Article suggests that the best framework for amending state
money transmitter laws to accommodate payment innovations while
continuing to protect against consumer losses requires a mash-up of the
“agent of a payee” approach and the amendments to the BSA. Specifically,
315. See Financial Crimes Enforcement Network; Amendment to the Bank Secrecy Act
Regulations—Definitions and Other Regulations Relating to Money Services Businesses, 74 Fed. Reg.
22,129-01 (proposed May 12, 2009) (to be codified at 31 C.F.R. pt. 103).
316. 31 C.F.R. § 1010.100(ff)(5)(ii)(B) (2013).
317. 31 C.F.R. § 1010.100(ff)(5)(ii)(F).

state money transmitter laws should be amended to unambiguously exclude

any agent of a payee from the definition of money transmission. In
determining the availability of the exemption, the key factor would be
whether the receipt and transmission of money by the agent to the payee
results in any greater risk of loss to the purchaser of the good or service
than a purchase and sale transaction where the payment is made directly to
the seller.318 As such, the exemption would depend on: (1) a valid written
agreement with the payee/seller; and (2) enforceable terms and conditions
between the agent/service provider, confirmation that the receipt of funds
by the agent/service provider is deemed receipt by the payee/seller and that
the payee/seller has no recourse against the purchaser for any failure of
performance by the agent/service provider.319
This framework combines the substantive inclusiveness and consumer
protection focus of the “agent of a payee” approach with the clarity and
drafting finesse of the amendments to the BSA. By basing the exemption
on the more inclusive “agent of a payee” approach, the exemption is better
able to account for the variations between different payment services and
innovations while allowing consumer protection to remain the driver for
regulation. In contrast to limiting the exemption to specific types of
payment services like the BSA amendments, or attempting to explicitly list
each and every type of exempt service, this framework allows consumer
protection to exist as a guiding principle on questions of regulatory scope
instead of focusing on the underlying technology, the type of service, or
business model nuances. In addition to being better suited to differentiating
between existing services, the “agent of a payee” approach allows for
ongoing guidance with respect to new payment innovations by not being
too narrowly focused.
The foregoing notwithstanding, the New York and Nevada approach
suffers for not clearly exempting agents of a payee from regulation via an
explicit statutory exemption or amendment to the definition of money
transmission. Instead, New York and Nevada have inserted the agent of a
payee language into the licensing mandate, which may result in some
confusion. Therefore, this Article suggests that, like the amendments to the
BSA, the agent of a payee language should be incorporated by amending
the definition of “money transmission” to exclude the activity, or otherwise
provide for an explicit exemption. Doing so provides for a more clearly
articulated position on the scope of regulation.
It should be noted that this Article does not mean to suggest that there
is no benefit to adopting activity-specific exemptions that narrowly address


defined types of payment services such as stored value,320 payment

processing,321 and money transmission by sellers where it is necessary and
integral to the sale of the seller’s goods and services.322 To the contrary,
targeted exemptions can and do provide added certainty regarding the
question of whether regulation applies to specific payment innovations and
new business models. However, such narrowly focused exemptions will be
of little benefit in clarifying the scope of regulation more broadly with
respect to new and emerging payment systems. As such, the agent of a
payee exemption would be an ideal supplement to targeted exemptions
dealing with new business models or technological advances.
D. Benefits of the Proposed Framework
The adoption of the agent of a payee framework for an exemption

would not only address the uncertain regulatory scope of money transmitter
laws, but also modernize such laws to account for new and emerging forms
of payment activity. Such an approach is narrowly crafted to ensure that the
consumer protection purpose of state money transmitter laws is served by
continuing to apply regulatory compliance requirements on those services
that pose a real risk of loss, and only exempting activities that will not run
afoul of the purpose of such statutes. Moreover, clarifying the scope of
regulation will allow for the continued development of innovative payment
mechanisms and the use of such mechanisms to facilitate the growth of
commerce in a modern cashless world without burdening those in the
payment industry with: (1) the cost and expense of complying with
inappropriately scoped regulatory requirements; (2) the transaction costs of
evaluating the scope and applicability of a statute that has yet to catch up to
technological advances; and (3) the risk of uncertain application of such
statutes by state regulators.
1. Providing Much Needed Clarity
The adoption of an exemption that clearly defines the compliance

obligations of third-party payment services providers that receive funds on
behalf of sellers will greatly reduce the risks facing such businesses by
virtue of an uncertain legal and regulatory landscape.323 The intentionally
broad definition of “money transmission” under most state laws leaves
open the very real possibility that a state regulator could elect to broadly
320. See, e.g., WASH. REV. CODE ANN.§§ 19.230.010(6), 19.230.020(12) (West 2013).
321. See, e.g., UNIF. MONEY SERV. ACT § 103(9), 7A U.L.A. 184 (2006).
322. See, e.g., 31 C.F.R. § 1010.100(ff)(5)(ii)(F).

interpret the scope of the statutory language and seek to require licensing
and regulatory compliance of a number of businesses, including Internet
and mobile payment systems.324 Because few states currently have express
statutory exemptions that clearly apply, there is little certainty.325
In Nevada, New York, and Ohio the agent of a payee exemption
appears to apply to exempt these services from regulation.326 In one other
state, Texas, these types of payment businesses may take some comfort in
the presence of an interpretive opinion that may be construed to indicate
the state regulator’s present position that payment processing is exempt
from money transmitter regulation.327 In other states, uncertainty over
potential regulation remains. Providers of Internet and mobile payment
service to merchant sellers must at a minimum bear the transaction costs of
evaluating the risk of potential regulation and deciding whether or not to
obtain a license.328 In addition, any person that elects to obtain a license and
comply with the regulatory requirements will bear the costs of maintaining
a money transmitter license and the compliance costs as an added expense
of doing business.329 Because these types of services do not result in added
consumer protection concerns, the added regulatory burdens are both
unnecessary and ineffectual.330 If a license is not obtained, the risk of
potential regulation and liability for noncompliance remains and may
compound over time.331
Those who elect not to obtain a license and comply with regulatory
requirements may have an argument based on statutory interpretation that
money transmitter laws are inapplicable to their services. At its most basic
level, the argument is that by acting as an agent for a seller of goods or
services, the agent is not in fact receiving money for transmission. As an
agent of a seller, receipt of funds by the agent is the equivalent of receipt of
funds by the seller. Therefore, receipt of payment by the agent and
subsequent delivery of funds to the seller who acts as principal is not
money transmission. While this is both a reasonable and perhaps even
appropriate interpretation, the possibility of regulation remains due to the
breadth of most state statutes and the lack of a clearly applicable exemption
324. See Think Computer Corp., supra note 30; see also Hurh & Luce, supra note 30.
326. See supra Part V.A.
327. See Tex. Dep’t of Banking, Op. No. 06-01 (May 15, 2006), available at
policy.ctspublish.com/txdob/; see also Tex. Dep’t of Banking, Op. No. 03-01 (June 4, 2003), available
at policy.ctspublish.com/txdob/.
329. See Sposito, supra note 204 (quoting Brian Riley that “[t]he pain in the neck is when you do
it in all 50 states”).
331. See 18 U.S.C. § 1960 (2006); MD. CODE ANN., FIN. INST. §§ 12-429 to 430 (LexisNexis
2011); see also Think Computer Corp., supra note 30.

or other guidance indicating that compliance is not required.332 As

evidenced by the foregoing, providers of such payment services are left in
the unenviable position of having few good options when it comes to
money transmitter regulation and compliance.
Given this uncertain legal and regulatory backdrop, state money
transmitter laws would benefit by clarifying the scope of money transmitter
regulation and answering the question of whether a host of new payment
services must become licensed money transmitters.333 As advanced by this
Article, the agent of a payee framework for a new exemption succeeds in
resolving this question by drawing an appropriate distinction between
payment services provided to merchant sellers pursuant to a contractual
arrangement that protects consumers and traditional money transfer
services provided directly to consumers. The former category of services
would be exempt while the latter would continue to be regulated under
state money transmitter laws based on a case-by-case assessment of the risk
of consumer loss.334 Accordingly, the adoption of the proposed regulatory
framework would provide the benefit of added certainty for those who
provide such services, those who seek to develop similar services, and the
state regulators who are tasked with enforcing the mandate of state money
transmitter laws.
2. Upholding Consumer Protection
In addition to providing certainty, the proposed agent of a payee

framework strikes an appropriate balance by allowing the breadth of state
money transmitter regulation to reach new services that raise the same
consumer protection concerns as traditional money transfer businesses
while leaving those without the same risks free to operate without licensing
and oversight.335 The consumer protection purpose of state money
transmitter laws is upheld by continuing to require licensing and regulation
of traditional money transfer businesses like Western Union that provide
money transfer services directly to consumer customers.336 This would be
true regardless of whether the money transfer service is provided from a
brick and mortar location or electronically via the Internet or a mobile
application.337
For example, where Western Union receives money from an individual
consumer through the Western Union website and the consumer engages


Western Union to deliver the funds to a designated person or place, a

money transmitter license and compliance with the state regulatory regime
would be required. In such instances, the agent of a payee exemption would
not apply because Western Union would not be receiving and delivering
funds as an agent of a merchant seller in connection with facilitating the
sale of the seller’s goods and services.338
In contrast, where a merchant seller contracts with a third party to
receive and deliver payments from the seller’s customers and complies
with the requirements for mitigating consumer loss, the activity would be
exempt from regulation.339 For example, if a book store contracts with
Amazon Payments or PayPal to provide a mechanism for accepting online
payments from a customer who wishes to purchase a book, Amazon
Payments and PayPal would not be engaging in regulated money
transmission so long as there were a valid contractual agreement with the
book store that eliminates any risk of loss to the buyer of the book after a
payment is made to Amazon Payment or PayPal, as the case may be.340
However, Amazon Payments and PayPal can both be used by individual
consumers to effectuate money transfers to designated individuals in the
absence of a purchase and sale transaction.341 In those instances, the receipt
and delivery of money is no different than the use of the Western Union
website. Therefore, licensing and regulation would be necessary for
services like Amazon Payments and PayPal for the latter activity, but not
the former.342
The foregoing examples illustrate how the proposed framework for an
agent of a payee exemption is narrowly tailored to not only maintain
regulation and licensing where appropriate due to the continued risk of
consumer harm, but also to clarify the scope of the statute in light of
technological advances. In doing so, the proposed framework would more
appropriately respond to the risks of these activities by acknowledging and
distinguishing between money transfer services provided to a consumer
customer and payment services on behalf of a seller pursuant to a
contractual agreement, which is inherently different. Therefore, the agent
of a payee exemption operates so as to support the consumer protection
purpose of state money transmitter laws.
338. See supra Part V.C.

341. See Send & Receive Money, AMAZON, https://payments.amazon.com/sdui/sdui/
personal/money (last visited Aug. 21, 2013); Transfer Overview, PAYPAL, supra note 268.

3. Accommodating Innovative Business Models, Modern Technology,

and Commerce
Finally, the proposed framework recognizes innovative business

models in the payments industry and new technology while appropriately
adapting existing laws to society’s growing e-commerce habits instead of
trying to force new payment systems into an incongruous regulatory box.
By differentiating between payment services and recognizing the unique
risks that each poses to consumers, the proposed framework promotes
continued innovation in the payments industry, which supports the realities
of a system of commerce that now relies heavily on non-cash payment
methods. The providers of Internet and mobile payment services and those
who continue to develop services will benefit by having an understanding
of the scope of regulation and not having to unnecessarily bear regulatory
burdens and costs. As such, money transmitter laws would be modernized
and appropriately scoped to regulate the actual consumer protection risks
implicated by changing technologies and advances in payment technologies
without needlessly hindering the development of services that help to drive
commercial growth in an increasingly cashless world.
CONCLUSION
State money transmitter laws, like many other statutes, suffer from an
inability to predict and account for technological advances that occur in the
years following enactment. Given the way that Internet and mobile
payment technologies have been embraced, it is high time that state
regulators and legislators look critically at state money transmitter laws and
unambiguously address the extent to which such laws apply to the ever
expanding ways that a person can electronically transfer money and make
payments. In modernizing state money transmitter laws, it is imperative
that we: (1) carefully consider and continually re-evaluate the scope of
regulation in light of new services and technological innovations; (2) make
an individualized determination of whether each new activity rightfully
ought to be regulated as money transmission; and (3) adopt new
amendments, as appropriate, to provide for clear and explicit exemptions
where the consumer protection purpose of state money transmitter laws is
not served.
Assuming that the consumer protection purpose of state money
transmitter laws should inform decisions regarding regulatory scope, the
agent of a payee exemption framework advanced in this Article strikes an
appropriate balance between the potentially divergent interests of
consumers and commerce. The framework provides guidance and clarity to
potentially regulated persons. In addition, the framework upholds the

integrity of consumer protection that underlies state money transmitter laws

by extending regulation to technological advances only where appropriate.
Perhaps most importantly, the framework alleviates concerns about the
chilling effect on innovation by embracing and exempting payment
innovations that do not implicate overt consumer protection concerns.
Thus, the agent of a payee framework will assist states in taking an
important first step toward appropriately modernizing existing laws to
accommodate new and emerging payment systems and developing a
cohesive regulatory scheme for such systems.

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UNIVERSITY OF NEW MEXICO SCHOOL OF LAW

LEGAL STUDIES RESEARCH PAPER SERIES

PAPER NO. 2013-06

Regulating the New Cashless World

February 18, 2013

REGULATING THE NEW CASHLESS WORLD

Internet and mobile payment volume is growing exponentially. From

Electronic copy available at: https://ssrn.com/abstract=2235937

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A. Transaction Costs .................................................................... 109

As merchants and consumers increasingly adopt and embrace

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The use of Internet and mobile payment technologies to conclude

squares-starbucks-deal-spark-the-end-of-cash/; Suzanne McGee, End Of Cash: Six Things That Could

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2013] Regulating the New Cashless World 81

Wireless),7 Merchant Customer Exchange (a mobile commerce platform

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undesirable alternatives20: forgo state licensing and risk sanction from a

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and imposes a myriad of state-specific licensing,24 financial security,25

24. See infra Part I.

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I. THE LEGAL AND REGULATORY LANDSCAPE OF MONEY TRANSMISSION

United States regulation of money transmission employs a dual-system

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money transmitter laws are essentially “safety and soundness” statutes

A. State Regulation of Money Transmission

While the statutory language varies from state to state,44 money

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comply with other requirements imposed on licensed money transmitters.47

1. The Definition of Money Transmission Under State Law

Most states attempt to define the scope of regulation by way of a

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Instead of narrowly defining the types of businesses that constitute

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2013] Regulating the New Cashless World 89

person B on behalf of person A then the activity is subject to regulation.62 A

2. Exemptions from Regulation Under State Law

Given the potentially expansive scope of money transmission, each

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otherwise be categorized as “money transmission” without a license and

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value devices such as gift cards.81 To clarify the scope of regulation in

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3. Compliance Requirements Under State Law

In the absence of an applicable exemption, state money transmitter

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